In late 2017, the New York Court of Appeals, in Global Reinsurance Corp. of Am. v. Century Indemn. Co., 30 N.Y.3d 508 (2017), provided guidance to the Second Circuit Court of Appeals on how New York law interprets reinsurance contracts and, in particular, the stated limits in facultative certificates and whether those stated limits are presumptive caps on the facultative reinsurer’s liability.  That guidance is evident in a recent case decided by the Second Circuit Court of Appeals in yet another dispute over facultative coverage for asbestos settlement liabilities.

In Utica Mutual Ins. Co. v. Clearwater Ins. Co., Nos. 16-2535, 16-2824, 2018 U.S. App. LEXIS 165110 (2d Cir. Sep. 25, 2018), the circuit court followed the New York Court of Appeals’ guidance in Global and vacated judgment for the cedent and remanded the case back to the district court.  On remand, the district court is to determine whether the facultative reinsurer is obligated to cover the asbestos-related claims expenses and whether the facultative reinsurer owes the cedent indemnification under its contracts on the basis of the cedent’s proven liability under its umbrella policies.

The underlying case should be familiar to most reinsurance practitioners.  The cedent issued many policies to an insured ultimately saddled with substantial claims for bodily injury arising out of asbestos exposure.  The reinsurer facultatively reinsured several of the cedent’s umbrella policies and participated on a facultative pooling arrangement.  The primary policies issued by the cedent during a certain period of time did not include aggregate limits of liability. Ultimately, the cedent and the insured settled and after paying enough of the settlement to trigger its reinsurance, began ceding the settlement payments to the reinsurer.  The cedent and reinsurer disputed the reinsurer’s obligations and a declaratory judgment action was filed by the cedent.

The district court held that the stated limit of liability capped the reinsurer’s obligations, but also held that the cedent’s settlement allocation was reasonable and in good faith and was bound under a follow-the-settlements obligation.

On appeal, the question was whether the expenses the reinsurer pays are capped at the reinsurer’s liability limit or must be paid in addition to it (the classic Bellefonte argument).  Relying on Global, the Second Circuit vacated the district court’s judgment.  The court noted that the New York Court of Appeals in Global specifically cited the district court’s opinion in this case as an example of a court improperly treating liability limits as unambiguously imposing a cap on liability.  Noting that the reinsurer’s liability was subject to the terms and conditions of the facultative certificates, the court held that the follow-the-form clause required that the reinsurer’s liability must follow the cedent’s liability unless the umbrella policies’ terms and conditions were inconsistent with those of the certificates.

Holding that there were no inconsistencies, the court restated the proposition that, under New York law, a naked limitation of liability or reinsurance accepted clause does not inherently cap the reinsurer’s liability at that amount.  The cedent’s umbrella policies, however, provided that the cedent had to reimburse the policyholder for expenses in addition to the limits.  The circuit court held that the reinsurer’s obligations under the certificates must track the cedent’s obligations under the umbrella policies.  Accordingly, when the reinsurer is liable to pay expenses, it must pay those expenses in addition to the stated liability cap.

The court remanded the case to the district court to determine whether the reinsurer is liable for the cedent’s asbestos claims payments.  That determination must be made under the cedent’s liability under its umbrella polices. The umbrella policies provide that the cedent must pay expenses in addition to the limits for any occurrence not covered by the underlying scheduled policies or any other insurance collectible by the insured, but covered under the umbrella policies.  The Second Circuit provided guidance to the district court by stating that if the umbrella policies do not insure asbestos-related expenses, then clearly the facultative certificates do not either.

The circuit court rejected the cedent’s argument that the facultative certificates contained a follow-the-settlements clause and directed that the district court must resolve in the first instance whether the umbrella policies obligate the cedent to pay asbestos-related costs.  Whether the cedent is obligated depends to the meaning of “not covered by” in the umbrella policies, an issue to be resolved by the district court.

The Second Circuit held that neither the facultative certificate nor the pooling agreement contained an express follow-the-settlements clause.  The pooling agreement merely contained a claims cooperation cause and the clause required the approval of the settlement by the pool manager before it could be binding on the reinsurer.  The court held that this was a condition precedent, the failure of which excuses performance by the other party.  While the cedent argued impossibility, the Second Circuit held that the party whose obligation to perform depends on the prior occurrence of a stated condition need not perform if the condition is not met even if the condition is impossible to satisfy.

Ultimately, the court held that the reinsurer was not obligated under the reinsurance agreements to follow the cedent’s settlement, but rather must indemnify the cedent according to the cedent’s proven liability on the umbrella policies.  The court vacated the judgment and remanded for trial the issue of the reinsurer’s actual liability to the cedent.