Reinsurance is insurance for insurers. Big money insurers often seek to defray their risk by paying a reinsurer to cover some of their liability for big payouts. For example, if an insurer issues a $10 million business policy, a reinsurance policy might cover half of that. So if a $10 million claim is paid by the insurer, the reinsurer would reimburse the insurer for $5 million of the cost.
The question is, though, if the reinsurer’s liability is capped at $5 million, does that cap automatically include litigation defense costs as a matter of New York law? In Excess Insurance Co. Ltd. v Factory Mutual Insurance Co. (3 NY3d 577 ), the Court of Appeals interpreted a facultative reinsurance policy (reinsurance of a single insurance policy) to hold that the parties had agreed to limit the reinsurer’s total liability, including defense costs, to the stated limit. The Excess decision was based on the terms of the specific reinsurance policy the Court interpreted, but it has been interpreted by other courts as a holding that under New York law, all reinsurance agreement liability limits include not only losses under the insurance policy, but also all defense costs.
In Global Reinsurance Corporation of America v Century Indemnity Co. (No. 124), which I previewed here, the Court of Appeals was asked to clarify the scope of its decision in Excess. In Global, Global issued reinsurance certificates to Century to reinsure insurance policies that Century had issued to Caterpillar Tractor Company. After Caterpillar was sued in numerous cases relating to alleged exposure to asbestos in Caterpillar’s products, Century was obligated to pay for Caterpillar’s defense expenses in addition to paying up to the liability limits of its policies. Global and Century then began to fight over the extent of Global’s liability under the reinsurance certificates.
The U.S. District Court for the Southern District of New York adopted Global’s interpretation of the reinsurance certificates that its total liability cap included defense costs. See Glob. Reins. Corp. ofAm. v. Century Indem. Co., No. 13 Civ. 06577, 2014 WL 4054260, at *4‐7 (S.D.N.Y. Aug. 15, 2014).
Noting that the Court of Appeals had not explicitly spoken on this issue, the Second Circuit certified the question to the Court of Appeals, asking whether the Court’s decision in Excess imposed a presumption or a rule of construction that would always include defense costs within a total reinsurance cap.
The Court of Appeals cleared up the confusion over its Excess decision, holding that reinsurance agreements should be interpreted like any other contract. Excess did not impose any presumption that defense costs are always included in a total reinsurance liability cap. That question will depend on the particular terms of the agreement. As the Court put it,
The foregoing principles do not permit a court to disregard the precise terminology that the parties used and simply assume, based on its own familiar notions of economic efficiency, that any clause bearing the generic marker of a “limitation on liability” or “reinsurance accepted” clause was intended to be cost-inclusive. Therefore, 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 makes sense. A reinsurance policy is like any other contract. The parties can bargain for particular terms and their intentions should control. If there’s one lesson to come out of the Court’s decision in Global, it’s to make sure that your reinsurance policy is very clear about what is included in any total liability cap. If defense costs are capped too, then say that in plain language. Otherwise, you too could be spending boatloads of money litigating over whether a few words in the agreement mean that the reinsurer has unlimited liability for defense costs, even over and above the total liability cap. And that’s no fun at all (except for the attorneys).
The Court of Appeals’ opinion can be found here.