National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum

THE OREGON COURT OF APPEALS ADDRESSES ESTOPPEL REGARDING THE ENFORCEMENT OF SUIT LIMITATION PROVISIONS AND AN INSURER’S DUTY OF GOOD FAITH AND FAIR DEALING IMPLIED IN THE INSURANCE CONTRACT

Posted in Appeals, Recent Cases

The Oregon Court of Appeals, in Brockway v. Allstate Prop. And Cas. Ins. Co., 284 Or.App. 83 (March 1, 2017), recently ruled in favor of an insurance company’s reliance on a suit limitation policy provision, issuing an opinion that reinforces the value for an insurance company in the practice of reserving all of  its rights and defenses and disavowing any waiver or estoppel in claims correspondence with its insured.  The Court’s holding also illuminates the scope of contractual claims for breach of the implied covenant of good faith and fair dealing in first-party insurance claims-handling cases.  A strong thread running through the Court’s holdings is  that when an insurance company represents to an insured that it is investigating a claim or loss, if it is not misrepresenting that fact or acting improperly in its investigation, the insurance company’s position in relying on a suit limitation provision is bolstered significantly.

The case involved the following facts.  On September 8, 2009, the insureds notified  Allstate of a theft of property from their backyard.  More than two years after the loss, Allstate denied coverage for the loss, asserting that the insureds had misrepresented material facts and failed to cooperate with the investigation. The insureds then sued Allstate, seeking damages for breach of contract and for breach of the implied covenant of good faith and fair dealing.  Allstate obtained summary judgment against all of the insureds’ claim because of a suit-limitation provision in their two policies that required them to bring any claim “related to the existence or amount of coverage or the amount of loss for which coverage is sought” within two years of the date of the loss.  The insureds appealed, asserting that the trial court erred by holding that there were no genuine issues of fact regarding whether Allstate was estopped from relying on the suit-limitation provision.  They further asserted that a different suit limitation provision in the policy, which was triggered by the accrual of the claim rather than the date of the loss, applied to their claim of breach of the duty of good faith and fair dealing.

The Court of Appeals rejected the insureds’ arguments, and affirmed the summary judgment in favor of Allstate. Regarding estoppel, the insureds had argued that they were justified in relying on Allstate’s conduct because every letter from Allstate recited that Allstate was continuing to investigate the claim, even in letters sent after the two-year suit limitation period elapsed.  They also emphasized that, even after the limitation period elapsed, Allstate’s attorney wrote to inform them that “Allstate can neither admit nor deny coverage at this time.”

The doctrine of equitable estoppel required that Allstate must have done something that affirmatively induced the insureds to delay their suit, and the Court held that there was no evidence that would allow a reasonable juror to infer that.   The Court explained that there was no evidence that Allstate made any misrepresentation, and that the evidence was that, even though Allstate had no duty to remind the insureds of the suit limitation, a year after the loss, Allstate did so in a letter.  In addition, Allstate repeatedly stated in its letters that it reserved all of its rights, and no waiver or estoppel was intended or should be inferred.    Also, in Allstate’s many communications with the insureds, it informed them that it was continuing to investigate the claimed loss, and there was no evidence suggesting that was not the case.   The Court also observed that, as a matter of law, under ORS 742.056, Allstate’s investigation of a loss or claim does not estop it from asserting any policy provision or defense under the policy.

The insureds had emphasized Allstate stated that it was continuing to investigate the claim in letters sent after the two-year suit limitation period elapsed.  The insureds asserted that Allstate, to be consistent with its position at trial on the suit limitation provision, should have written instead that the claim was barred.   The Court dismissed this argument as inapt, noting that the suit limitation provision was a condition of forfeiture that does not nullify coverage, but instead bars a suit once the limitation period passed.  The court also noted that those letters could not have influenced the insureds’ decision to not file a suit before the suit-limitation period elapsed.

In their second assignment of error, the insureds argued that the trial court erred in granting summary judgment to Allstate on their claim for breach of an implied covenant of good faith.   The insureds relied on the same conduct that they asserted had estopped Allstate from relying on the suit limitation provision.  The insured’s had argued that they had a reasonable expectation that Allstate would fairly evaluate and investigate the claim, and that a jury could find that Allstate breached its duty of good faith by taking more than 17 months to evaluate a simple property theft, by requiring EUOs and further documentation after the limitation deadline, and the issuing a denial based on misrepresentations and concealment after the deadline passed.

The Court rejected the insured’s arguments, explaining at the outset that under Oregon law, a claim for breach of the duty of good faith and fair dealing in first-party insurance claims handling cases is a breach of contract.   Under the case law the Court relied upon for that proposition, such claims are not tort claims or extra-contractual bad faith claims.  The Court explained that duty of good faith and fair dealing was to be applied in a manner that would effectuate the objectively reasonable expectations of the parties to the insurance policies, and it held that there was no evidence that any of Allstate’s actions were contrary to the insured’s reasonable expectations based on the terms of the insurance policies.

The Court explained that it made no difference that Allstate did not remind the insureds of the suit limitation in every letter it sent, because the insurance policies imposed no such duty on Allstate., and the insureds had no objectively reasonable expectation that Allstate would inform them of the suit limitation, much less that it would repeat that information after having already done so once during its investigation. The Court further explained that Allstate’s communications reflected its continued attempts to determine the losses attributable to the claimed theft, and the insureds pointed to no evidence that suggested the investigation was improper.   Finally, it also noted again that there was no evidence that Allstate did anything that reasonably induced the insured to not commence any legal action until after the suit limitation period elapsed.

Notice of Disclaimer Sent Only to Additional Insured’s Carrier Ineffective under NY Statute Requiring Timely Disclaimer to Insured

Posted in Additional Insured

New York’s Appellate Division, Second Department, holds that a disclaimer or denial of coverage sent to an additional insured’s carrier, which was not an agent for receiving such notice, was ineffective to disclaim coverage under N.Y. Ins. Law Section 3420(d).

In Harco Construction, LLC v. First Mercury Insurance Company, Harco had entered into a construction contract with 301-303 West 125th, LLC. Harco then entered into a subcontract with Disano Demolition Company, under which Disano agreed to demolish structures located on 301-303’s premises. Disano also agreed to purchase a CGL policy naming Harco and 301-303 as additional insureds. FMIC issued a policy to Disano with an additional insured endorsement, which included as insureds organizations for which Disano was performing operations when Disano and such organization had agreed in writing that such organization be added as an additional insured. Harco also was a named insured under a CGL policy issued by Mt. Hawley.

In the course of construction, a partially demolished five-story building collapsed, resulting in numerous personal injury claims against Harco and 301-303. Harco’s insurer, Mt. Hawley, sent a letter to FMIC on behalf of Harco and 301-303, providing notice of the incident and demanding that FMIC defend and indemnify Harco and 301-303 for any resulting claims. FMIC responded with a letter to Mt. Hawley, disclaiming any duty to defend or indemnify Harco, because an exclusion for “[a]ll work over 1 story in height” barred coverage for the claims. FMIC, however, did not disclaim coverage as to 301-303, and did not send its disclaimer letter directly to either Harco or 301-303.

In this action, Harco and 301-303 sought a judgment declaring that FMIC was obligated to defend and indemnify them in the underlying actions.

The court found that the exclusion was applicable to the loss; however, the issue was whether FMIC had waived and/or should be estopped from disclaiming coverage for its failure to send a copy of its disclaimer letter directly to Harco and 301-303. As to Harco, the court found that FMIC’s failure to do so violated N.Y. Ins. Law Section 3420(d), which, for claims arising from accidents resulting in bodily injury or death, requires that an insurer timely disclaim coverage or be estopped form doing so. Here, although FMIC issued a disclaimer letter to Mt. Hawley, it never sent the letter to Harco, and, although Mt. Hawley was acting on behalf of Harco when it sent notice of the occurrence to FMIC, “that did not make Mt. Hawley [Harco’s or 301-303’s] agent for all purposes, or for the specific purpose that is relevant here: receipt of a notice of disclaimer (citations omitted).” The court reasoned that Mt. Hawley’s interests were not necessarily the same as Harco’s in the litigation, and, because Harco had its own interests at stake, Harco was entitled to direct notice from FMIC under the statute.

The court found FMIC’s disclaimer as to 301-303 was effective, because FMIC had demonstrated that 301-303 was not an additional insured under the policy, and that “[a] disclaimer [under the statute] is unnecessary when a claim does not fall within the coverage terms of an insurance policy” (citations omitted).

Contractor’s Tools Exclusion Bars Coverage for Crane Collapse under Builder’s Risk Policy

Posted in Builder's Risk

In Lend Lease (US) Construction LMB Inc. v. Zurich American Insurance Company, New York’s high court holds that the contractor’s tools exclusion barred coverage for a tower crane collapse caused by Superstorm Sandy under a builder’s risk policy. The crane was installed on a reinforce slab on the 20th floor of the building, and was to be removed from the site once the project was completed, though components of the crane were to remain part of the building after construction was completed. The crane tower was damaged when Superstorm Sandy made landfall, causing the boom to collapse in the high winds. At issue was whether the crane was covered by the policy in the first instance, and, if so, whether the contractor’s tools exclusion defeated coverage for the claim.

Whether the crane was covered in the first instance turned on whether the crane was a “temporary structure” within the meaning of the policy, and whether it was “incidental to the project.” The court concluded that the crane was a “structure”, and that it was “temporary”, in that it was to be removed upon completion of the work. The court also concluded that whether the crane was “incidental to the project” was “of no moment,” in that the purpose of the project was the construction of the building, not the crane. However, the court concluded there were issues of fact whether the crane was covered in the first instance, because a dispute about whether the crane was disclosed as part of the “total project value” created a triable issue of fact.

Notwithstanding, the court found that the crane damage was excluded by the contractor’s tools exclusion, which provided:

Th[e] Policy does not insure against loss or damage to … Contractor’s tools, machinery, plant and equipment including spare parts and accessories, whether owned, loaned, borrowed, hired or leased, and property of a similar nature not destined to become a permanent part of the INSURED PROJECT, unless specifically endorsed by the Policy.

In finding that the exclusion applied, the court concluded that the crane was “machinery” within the meaning of the exclusion, and that, although components of the crane were to remain a permanent part of the building, the components were reinforcements and ties; that the principal parts of the crane were not to become a part of the building. The court rejected arguments that the exclusion rendered the coverage illusory, reasoning that the exclusion did not defeat all coverage under the policy’s temporary works provision; coverage still would be available the cost of erecting scaffolding, for “temporary buildings”, and for “formwork, falsework, shoring, [and] fences,” which are not “tools” within the meaning of the exclusion.

Second Circuit Deems Policy Ambiguous Regarding Post-Exhaustion Defense

Posted in Duty to Defend, Liability Coverage

By David M. Knapp, Ward Greenberg Heller & Reidy LLP

In American Commercial Lines LLC, et al. v. Water Quality Insurance Syndicate, 16-91-cv(L) (2d Cir. Feb. 10, 2017), the Second Circuit reversed a decision from the Southern District of New York, which held that a maritime insurer was obligated to continue defending its policyholder in connection with claims arising from an oil spill in the Mississippi River, even after its policy limits were exhausted. The policy at issue contained indemnity coverage for liability arising from oil spills and provided that defense costs would be paid for “any liabilities covered” under the policy. The policy further provided that such defense costs were in addition to the limits of liability. The insurer argued that once the limits of liability were exhausted from indemnity payments, there no longer were any “liabilities covered” under the policy, and, therefore there no longer was an obligation to pay defense costs. The policyholder argued that the phrase “liabilities covered” referred only to the type of liabilities covered under the policy, without regard to the available limits, and therefore that the insurer was obligated to continue paying defense costs, even after the limits were exhausted. The district court sided with the policyholder. The Second Circuit reversed, however, holding that the interpretations offered by the policyholder and the insurer both were reasonable, and, therefore that the policy was ambiguous. Among other things, the court looked at extrinsic evidence – the parties’ own actions after the limits of the policy were exhausted – and the “overall structure and purpose of the policy” as support for the insurer’s proffered interpretation. The court remanded the case to the district court to “assess the extrinsic evidence as well as further evidence adduced through discovery” to determine the intent of the parties.

NY Appellate Courts Address Liability Policy Exclusions

Posted in Liability Coverage

By David M. Knapp, Ward Greenberg Heller & Reidy LLP

New York’s Appellate Division recently issued two decisions of note:

In Country-Wide Ins. Co. v. Excelsior Ins. Co., 2017 N.Y. Slip Op. 00718 (1st Dept. Feb. 2, 2017), the First Department reaffirmed that, in New York, the phrase “arising out of” is to be construed broadly, even where it appears in an exclusion. This case involved coverage for an underlying action in which plaintiff allegedly was injured when a lift gate failed while plaintiff was unloading material from a shipping trailer. The Court held that an exclusion in a CGL policy for bodily injury “arising out of” the use, including loading and unloading, of autos operated by or rented or loaned to the insured, barred coverage for the claim. In so holding, the Court noted that the phrase “arising out of” when found in an exclusion is to be construed broadly, such that a claim is excluded if it would not exist “but for the existence of the excluded activity or state of affairs.” The Court also rejected the insured’s argument that the exclusion did not apply because the injury was caused by the defective nature of the trailer lift gate, holding that, “[t]he focus of the inquiry is not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained.”

In  Hansard v. Fed. Ins. Co., 2017 N.Y. Slip Op. 00633 (2d Dept. Feb. 1, 2017), the Second Department held that an insurer had no duty to defend or indemnify an insured under a D&O policy for claims alleging that the employer-insured violated the Fair Labor Standards Act and New York Labor law by (1) depriving employees of regular and overtime pay by requiring them to work “off the clock” and misclassifying them as “salaried,” (2) discharging employees before a certain date to avoid paying promised settlement packages, (3) failing to keep accurate records of wages and hours, and (4) delaying issuance of paychecks beyond when payment was due. The policy provided coverage for “Wrongful Act[s],” as that term was defined, but excluded coverage for “any employment-related Wrongful Act.” The term “employment-related” was not defined in the policy; however, the Court, relying on dictionary definitions of the words, held that the term “employment-related” was unambiguous and meant “connected by reason of an established or discoverable relation to the act of employing or the state of being employed.” Under that definition, the Court found that the allegations of the underlying complaint fell squarely within the exclusion and therefore that there was no coverage. The court also held that it was irrelevant that the phrase “employment-related Wrongful Act” might be ambiguous in the context of other “employment-related” claims, because it was not ambiguous in the context of the claims at issue before the Court.

Washington’s Insurance Fair Conduct Act Does Not Create a Cause of Action for Regulatory Violations

Posted in Auto Liability Coverage, Liability Coverage, News, Recent Cases, Uncategorized

Today, in Isidoro Perez-Crisantos v. State Farm Fire & Casualty Company, the Washington Supreme Court held the Insurance Fair Conduct Act (IFCA) did not “create[] a new and independent private cause of action for violation” of  the Washington Administrative Code (WAC) “in the absence of any unreasonable denial of coverage or benefits.”

This case arose out of Perez-Crisantos’s claim for uninsured motorist (UIM) coverage following an auto accident. Perez-Crisantos’s insurer, State Farm, denied his claim on the grounds that he was seeking benefits for excessive chiropractic treatment and a shoulder surgery unrelated to the auto accident. Perez-Crisantos filed suit, alleging violations of IFCA, IFCA’s implementing regulations, and the Consumer Protection Act, as well as bad faith and negligence claims. Most claims were stayed while Perez-Crisantos’s UIM claim was arbitrated. The arbitrator found mostly in his favor, and ultimately Perez-Crisantos collected approximately $24,000 in UIM benefits.

When the stay was lifted, Perez-Crisantos amended his complaint to clarify he was alleging violation of WAC regulations relating to unfair settlement practices. Perez-Crisantos contended that State Farm required him to litigate in order to receive benefits to which he was entitled, in violation of regulations making it unfair or deceptive to “[c]ompel[] a first party claimant to initiate or submit to litigation, arbitration, or appraisal to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in such actions or proceedings.”

On motions for summary judgment, the trial court ruled in favor of State Farm. Perez-Crisantos requested direct review, which the Washington Supreme Court granted. The dispute centered on the legislative intent of IFCA. RCW 48.30.015 provides:

  1. Any first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys’ fees and litigation costs, as set forth in subsection (3) of this section.
  2. The superior court may, after finding that an insurer has acted unreasonably in denying a claim for coverage or payment of benefits or has violated a rule in subsection (5) of this section, increase the total award of damages to an amount not to exceed three times the actual damages.
  3. The superior court shall, after a finding of unreasonable denial of a claim for coverage or payment of benefits, or after a finding of a violation of a rule in subsection (5) of this section, award reasonable attorneys’ fees and actual and statutory litigation costs, including expert witness fees, to the first party claimant of an insurance contract who is the prevailing party in such an action.

5. A violation of any of the following is a violation for the purposes of subsections (2) and (3) of this section:

(a) WAC 284-30-330, captioned “specific unfair claims settlement practices defined.”

As the Court explained, “given that the trier of fact must find that the insurer acted unreasonably under subsection (1), and that such a finding mandates attorney fees under subsection (3) and gives the trial court discretion to award treble damages under subsection (2), it is not clear what a finding of a regulatory violation accomplishes.”

Resolving a split among Washington federal courts, the Court held that the alleged regulatory violation at issue here was not independently actionable under IFCA. In doing so, the Supreme Court specifically disagreed with the Eastern District of Washington’s ruling in Langley v. Geico, Gen. Ins. Co., 89 F.Supp.3d 1083, 1085 (E.D. Wash. 2015).  Acknowledging IFCA was ambiguous, the court nevertheless concluded that the weight of the legislative history did not support reading IFCA to create an implied cause of action for regulatory violations.

Resolution of this split and the larger uncertainty surrounding IFCA actions is sure to be consequential for insurers. The Court’s holding will also result in a change to the pattern jury instructions for an IFCA claim.

Extrinsic Evidence Triggers Duty to Defend under New York Law

Posted in Additional Insured, Duty to Defend

A recent decision from a New York appellate court reminds us that, under New York law, the duty to defend may be triggered not only by the allegations of a complaint, but also by extrinsic evidence, i.e., actual knowledge of facts outside the four corners of the complaint establishing a reasonable possibility of coverage.

The issue in City of New York v. Wausau Underwriters Insurance Company was whether the City, a putative additional insured under policies issued to its electrical contractor, was entitled to a defense in five underlying personal injury actions. Per the additional insured endorsements attached to the contractor’s policies, the City was an additional insured for “liability caused, in whole or in part, by the negligent acts or omissions of [the electrical contractor]….” The complaints in two of the actions did not mention the City’s contractor; thus, the court found that the duty to defend was not triggered by the facial allegations of the complaints. Notwithstanding, in both cases the insurer had been notified by the City’s law department of facts establishing a reasonable possibility that the injury arose from work performed by the contractor under contract with the City. Thus, in those actions, the court found the duty to defend was triggered by extrinsic evidence.

The complaints in two other actions contained allegations against both the City and its contractor, and the City notified the insurers of facts establishing a reasonable possibility that the injury arose from work performed by the contractor were made known to the insurer. Thus, in both cases, the duty to defend was found to have been triggered both by the facial allegations of the complaints and by extrinsic evidence.

The court found that a fifth action did not trigger a duty to defend because, while there were allegations and extrinsic evidence that the injuries arose from work performed by the contactor, the accident occurred after the contractor’s work was completed, and therefore was excluded by the policy’s products-completed operation hazard exclusion.

Criminal Acts Exclusion and Joint Obligations Clauses Bar Coverage for Claims Arising from Insured’s Criminal Act

Posted in Personal and Advertising Injury, Property Insurance, Recent Cases

Criminal Acts Exclusion and Joint Obligations Clauses Bar Coverage for Claims Arising from Insured’s Criminal Act

In Allstate Insurance Company v. Morgan, 123 F. Supp. 3d 1266 (D. Or. 2015), the District of Oregon held an insurer was not obligated to defend their insured’s son against tort claims arising out of the son’s assault on a party guest.

The underlying case arose out of an incident that occurred during a party hosted by the insured’s son at the insured’s home. The insured’s son and three other attendees assaulted another guest, causing serious injury. The insured’s son pled guilty to assault.

The injured guest then filed a complaint against the Morgans for negligence as well as additional claims against others. Allstate denied any duty to defend or indemnify the Morgans. Allstate argued (1) the Criminal Acts Exclusion Clause barred coverage, (2) the Joint Obligations Clause barred coverage, and (3) there was no “occurrence” under the Policy. Allstate also requested the court stay the coverage case pending the resolution of the underlying case.

The magistrate judge declined to stay the case, reasoning that Allstate’s coverage obligation could be determined by considering only the terms of the Policy and the fact that the insured’s son committed a criminal act, as evidenced by his guilty plea.

The Court then concluded the Criminal Acts Exclusion Clause barred coverage of both the insured and her son. The Morgans argued that Allstate’s duty to defend was established by looking only at the complaint, which alleged negligence. Further, the guilty plea did not establish that the insured’s son’s criminal acts actually caused the bodily injuries alleged in the complaint. The Court rejected these arguments, explaining that “[a] guilty plea resulting in a criminal conviction can have a preclusive effect in a subsequent civil proceeding,” and, accordingly, Allstate had no duty to defend the insured’s son. Then, reaching an issue of first impression in Oregon, the court held Allstate had no duty to defend the insured herself, even though she played no role in the assault. Based on the Policy language and out-of-state cases, the Court concluded that the Criminal Acts Exclusion Clause barred coverage for bodily injury that was caused by any insured’s criminal acts.

The district judge adopted the magistrate judge’s recommendation over objection, adding that the Joint Obligations Clause also supported the magistrate’s recommendation. The Court noted that “numerous other courts have interpreted identical joint obligation clauses and have held that the language renders the criminal acts exclusion applicable to claims for negligence against other insureds.” Having decided the case based on the Criminal Acts Exclusion Clause and the Joint Obligations Clause, the Court did not reach the occurrence question.

2016: A Year of Anniversaries

Posted in Continuous or Progressive Property Damage, News, Uncategorized

Even as this annus horribilus passes into oblivion, we note several important anniversaries in 2016.

Fifty years ago saw a confluence of legal theory, case law and insurance industry developments that  led ineluctably to the storm of mass tort litigation that crashed upon the insurance industry within a few years and that continues to plague us fifty years later.

In 1966, the National Bureau of Casualty Underwriters (predecessor to ISO) responded to pressure from the London Market to broaden CGL coverage by abandoning the “caused by accident” language that insurers had relied on up to that point to restrict their policies to “big bang” events.  In its place, the NBCU substitute the modern conception of an “occurrence” that covered not only abrupt happenings but losses due to “exposure to conditions.”   The adoption of “occurrence” language coincided with the American Law Institute’s adoption of a new Section 402A in the Restatement of Torts that pioneered the imposition of strict liability for product manufacturers that, coupled with 1966 amendments to Rule 23 of the Federal Rules of Civil Procedure that liberalized the filing of class actions, pioneered the waves of mass tort litigation and products liability claims that ensued in the following decades:  asbestos, Benedictin, Dalkon Shield, DES, breast implants and so on.

Thirty years ago saw the adoption of largest change to the CGL form since 1973 and the widespread implementation of mandatory exclusions for asbestos and environmental liabilities.   What is often forgotten is the failed effort of ISO and a large segment of the casualty industry to jettison “occurrence” coverage altogether in favor of “claims made” CGL coverage, an effort that resulted in a massive antitrust challenge by nineteen states attorneys general that ended up in the United States Supreme Court in 1993.

Fifteen years ago was, of course, the tragedy of the World Trade Center, a seminal event in our political and cultural history and also the source of an extraordinary number of insurance coverage dispute ranging from the famous two towers/two “occurrences” controversy to innumerable smaller fights over business interruption losses around the country.

Will we remember 2016 in the years to come?

Second Circuit Reconsiders Bellefonte Re Reinsurance Doctrine

Posted in Reinsurance

The fate of the so-called Bellefonte Re doctrine is now up to the New York Court of Appeals.  On December 8, the Second Circuit issued an opinion in Global Reinsurance Corp. v. Century Ind. Co., No. 15-2164 (2d Cir. Dec. 8, 2016) asking New York’s highest state court to answer whether a District Court erred in declaring that the dollar amount stated in the “Reinsurance Accepted” section of certain reinsurance certificates unambiguously caps the maximum amount that a reinsurer can be obligated to pay a cedent for “losses” and “expenses” combined.

In the underlying case, a court ruled that Century Indemnity was obliged to pay defense costs to Caterpillar in addition to the indemnity limits of its policies for the underlying asbestos suits.  Global Re contended (and the District Court agreed), however, that its obligations under these reinsurance certificates were capped by the limits of coverage, whereas Century Indemnity has argued that its reinsurer must also pay expenses in light of language in the certificates stating “the liability of [Global] specified in Item 4 above shall follow that of [Century] and, except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of [the underlying liability insurance policy].”

Whereas Global Re argued that the amount stated in the “Reinsurance Accepted” section caps the maximum amount that it can be obligated to pay for both loss and expenses combined and that the maximum amount that it can be required to pay under a particular certificate was the “occurrence” limit exceeding Century’s retention ($250,000), Century contended that the amount stated in the “Reinsurance Accepted” provision applies only to “loss” and that Global must pay all expenses that exceed that amount.

Although it would appear that the District Court’s analysis was consistent with the Second Circuit’s opinion in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990), which has been a cornerstone of reinsurance litigation for nearly three decades now, the Second Circuit expressed uncertainty with respect to whether it had correctly decided Bellefonte or had taken industry custom and usage into account in its analysis.  Accordingly, it agreed to certify the following question to the New York Court of Appeals:

Does the decision of the New York Court of Appeals in Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004), 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?

In agreeing to reconsider Bellefonte, the Second Circuit was clearly influenced by amicus briefs filed by several large reinsurance brokers warning that continuing to follow Bellefonte could have “disastrous economic consequences” for the insurance industry and that “potentially massive exposures to insurance companies throughout the industry would be unexpectedly unreinsured.” creating a “gaping hole in reinsurance for many companies, and potentially threaten some with insolvency.”