In an interesting turn of events, the United States Court of Appeals for the Second Circuit did not issue a ruling in Global Reinsurance Corp. of America v. Century Indemnity Co.15-2164-cv (Decided December 8, 2016), and instead certified a question back to the New York Court of Appeals as to whether 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.

In Global, the plaintiff moved for partial summary judgment seeking a declaration that certain reinsurance certificates capped the maximum amount that Global could be obligated to pay for both loss and expenses (including defense costs) combined.  Under reinsurance certificates issued to Century, Global was to reinsure specified portion of general liability insurance policies that Century had issued to non-party Caterpillar Tractor Company.  As a result of separate litigation, Century was required to reimburse Caterpillar for both indemnity limits of the policy and defense expenses, for which Century sought reimbursement from Global.  Century argued that the reinsurance certificates only capped the amount of “loss” that Global was required to pay, and that Global was also required to pay any expenses, such as defense costs, that exceeded the “loss” amount.

The Second Circuit found that there was uncertainty in whether there was a rule or a rebuttable presumption that “where a reinsurance contract is subject to a per occurrence liability cap, the cap limits the total reinsurance available regardless of whether the underlying insurance policy is understood to include expenses other than losses, for instance, defense costs.” The Second Circuit has asked the Court of Appeals to take up the issue.

The resolution of this issue would determine whether in future cases the Court would construe each reinsurance policy solely based on its own language or based on a standard rule to be utilized uniformly.  Once the Court of Appeals makes its decision, it will impact whether reinsurers will be able to cap the amount paid for defense costs.  In the meantime, reinsurers should consider specific contractual language limiting the amount to be paid for defense costs.

Thanks to Valeria Prizimenter for her contribution to this post.