Those of you who dabble in reinsurance disputes are familiar with Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 930 F.2d 910 (2d Cir. 1990) and its progeny. Many trees have been sacrificed explaining and arguing for and against the “rule” set in Bellefonte and its affect on claims expenses and limits in facultative certificates and reinsurance coverage for long-tail liabilities like asbestos and environmental exposures. On May 5, 2016, the Second Circuit Court of Appeals will hear argument in yet another case decided based on the Bellefonte principle.
In what appears to be an attempt to address the ramifications of the Bellefonte principle head on, a consortium of reinsurance brokers has recently filed an amicus brief asking the court to reverse the District Court’s ruling in Global Reins. Corp. of Am. v. Century Indem. Co., No. 13 Civ. 06577 (LGS) 2014 U.S. Dist. LEXIS 113793 (S.D.N.Y. August 15, 2014) (the link is to the opinion denying reargument). The brief argues that the decision, if upheld, threatens the proper function of reinsurance and could lead to potential insolvencies. The arguments are not new on the effect of capping defense costs based on the limits in the facultative certificate. But the effort to educate the court on the costs associated to ceding companies based on the ruling from the broker community is a bit different.
Many attempts have been made in the past to persuade the Second Circuit that the Bellefonte principle should not apply in all situations and, in fact, should be reversed. For the most part, all those attempts have failed with the Second Circuit tending to stick to its interpretation of the limits of a facultative certificate. But there has been some movement recently in recognizing that not all facultative certificates must be read as cost-inclusive and capped by the certificate’s reinsurance accepted amount.
In 2014, in a summary order, the circuit court reversed the district court and remanded a case back to the district court to consider extrinsic evidence on the meaning of the facultative certificate. Utica Mut. Ins. Co. v. Munich Reins. Am., Inc., No. 13-4170-cv, 2014 U.S. App. LEXIS 22765 (2d Cir. Dec. 4, 2014) (Summary Order). This case has been read by some to give some glimmer of hope that the Second Circuit is reconsidering its strict view on facultative certificate limits and costs.
Perhaps the Utica decision prompted the brokers’ amicus brief or perhaps the broker community, which typically represents cedents, felt it was time to press for reconsideration of Bellefonte. In any event, sometime after arguments are heard on May 5 we will learn if the Second Circuit is going to back off Bellefonte or reiterate its commitment to how it reads facultative certificates, often with strict caps on expenses and indemnity regardless of the underlying policies or intent.