An interesting trend has emerged from the New York Court of Appeals. In several recent cases, parties have asked the court to declare that a bright line rule of construction or presumption arises in every case where an insurance or reinsurance contract has certain language. The high court has rejected this call for a bright line rule and has reiterated that when interpreting an insurance or reinsurance contract under New York law, the normal rules of contract interpretation apply and each contract stands on its own terms, conditions and facts. The latest installment of this trend was issued on December 14, 2017, a bellwether day in New York reinsurance law (no pun intended).
On November 15, 2017, the New York Court of Appeals heard argument in Global Reinsurance Corp. of America v. Century Indemnity Co. The case came to the court about a year ago as a certified question from the Second Circuit Court of Appeals. The question the Second Circuit wanted the New York Court of Appeals to answer was: “Does the decision of the New York Court of Appeals in [Excess] impose either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?” Excess refers to Excess Ins. Co., Ltd. v. Factory Mutual Ins. Co., a case that many observers believed put New York law squarely in the Bellefonte column.
In its December 14, 2017 decision, the New York Court of Appeals answered the Second Circuit’s certified question in the negative. No, said the court. “Under New York law generally, and in Excess in particular, there is neither a rule of construction nor a presumption that a per occurrence liability limitation in a reinsurance contract caps all obligations of the reinsurer, such as payments made to reimburse the reinsured’s defense costs.” The opinion, written by Judge Feinman who asked several questions at oral argument, was unanimous. The opinion is a mini-treatise on reinsurance law and insurance and reinsurance contract interpretation. You should read it.
A couple of interesting points. First, although the certified question did not explicitly limit itself to facultative reinsurance–a concern that I had when I read the Second Circuit’s decision–the New York Court of Appeals took the question to be solely about facultative reinsurance and not about reinsurance treaties, “which do not have a single ‘underlying policy.'”
Second, the court never mentioned Bellefonte. The opinion hewed closely to Excess and what Excess held under New York law. The court recognized that while in Excess it did not say that defense costs under a fac cert are unambiguously or presumptively capped by the liability limits of the certificate, some courts read Excess that way. As stated by the court, “[w]e now dispel any intimation that Excess established such a rule.”
The court explained that in Excess it focused on the limited context of that case and the specific contract wording and was not faced with the question of whether there was some blanket rule or presumption. “Critically, we did not read the limit clause in isolation, but in light of the entire agreement as an integrated whole, ‘giv[ing] meaning to every sentence, clause and word’ thereof” (citations omitted). The court also noted that the expenses in Excess were incurred in coverage litigation and as not third-party defense costs, so the issue of whether the following form clause subjected the reinsurer to the same terms as the original policy so as to require the reinsurers to cover defense costs in excess of the limit was not at issue.
To be clear, the court stated, “[w]e hold definitively that Excess did not supersede the ‘standard rules of contract interpretation’ . . . otherwise applicable to facultative reinsurance contracts.” (citation omitted). The court read Excess in harmony “with the traditional rules of contract interpretation reiterated numerous times by this Court.” The latter comment is followed by a string of New York Court of Appeals citations, but also alludes to its recent decision in Viking Pump, where the court rejected another attempt at a blanket rule.
The court concluded with a few more important statements. First, it reiterated that “New York law does not impose either a rule, or a presumption, that a limitation on liability clause necessarily caps all obligations owed by a reinsurer, such as defense costs, without regard for the specific language employed therein.” That, of course, doesn’t mean that reinsurers now lose and ceding companies now win. It means that New York courts have to look at the words and context of the specific contract, read it in harmony as a whole, and determine on a specific basis whether defense costs are payable outside the fac cert’s liability limit. Second, the court emphasized that it was asked only to decide a narrow issue–the certified question about Excess–and nothing else.
The next step is for the Second Circuit, now that it has its certified question answered, to determine how the fac cert will be interpreted, not based on a presumption, but based on the specific words of the specific contract.