In 2016, Reviews of Best published our article titled “The return of the Bellefonte cap. “As we have explained, the cap arose out of the decision of the United States Court of Appeals for the Second Circuit in 1990 in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co. In Bellefonte, the second circuit considered that the declaratory judgment of a transferor costs, that is to say, expenses related to coverage disputes with direct policyholders were capped by the liability limits of a reinsurance contract, in particular an optional certificate. At the time of our publication, Cape Town seemed alive and well, albeit still controversial. The occasion of our article was oral argument in a second circuit case, Global Reinsurance Corp. of America v Century Indemnity Co.
Now, more than five years later, the Second Circuit has set sail for a rest. On December 28, 2021, in the same dispute between Global Re and Century, the Second Circuit unequivocally stated that the Bellefonte Cap “no longer constitute[s] the law of our circuit. “Cape Town” ‘is no longer the right law[.]'”
It was a long, winding road to Cape Town’s last resting place. In 2018, the Second Circuit, based on the response of the New York Court of Appeals to a certified question that there is no hard and fast rule of law, overturned the district court, which had applied the Cape by rote, and remanded for consideration the terms of the particular contract at issue, using standard principles of contract interpretation. On remand, the district court, on the basis of the contractual terms and substantial expert testimony, concluded that “the clear and unambiguous meaning of the reinsurance contracts at issue in this case is that Article 4 [of the certificates] caps losses and also caps spending when there are no losses, but does not cap spending when there are losses. “
In the ruling issued on December 28, 2021, the Second Circuit upheld the district court’s ruling, unapologetically burying its precedent. Of particular note is the Second Circuit’s discussion of expert testimony submitted by both parties to the district court. Here is a passage:
[Our] The conclusion is supported not only by the unambiguous language of the certificates, but also by the “credible testimony regarding custom and practice in the industry” that Century experts provided to the district court. World VI, 442 F. Supp. 3d at 590. An expert testified that “during the 1970s and thereafter it was the constant custom and practice of the insurance and reinsurance industry” that “unless otherwise stated, certificates reinsurance optional covered the costs of investigation and defense in addition to the limits of liability where the reinsured policy covered expenses in addition to its limits of liability. J. App’x 289 (Hall Statement 2). further stated that “[w]hilum no[con]currency between the optional certificate and the reinsured policy “was” possible “, it was” rare “, and therefore”[t]o overcome the textual presumption of [con]currency indicated in the following formal provision “, it was necessary” clearly and explicitly “both” to indicate non-compete “and to” define the nature of the non-compete “. J. App’x 295 ( Hall Statement ¶ 20 According to this expert, such non-competition would be indicated “by endorsement” or “by checking the ‘Non-competing’ box on the certificate form and specifically indicating the non-competition elsewhere on the form”. non-competition would not be found, as Global insists, “in the wording of the certificate form itself”. Username.; see also id. at 380 (Thomson Statement ¶ 12) (“The accepted reinsurance provision is not a provision used to identify non-compete.”).
Since the non-compete “would be… specifically identified and negotiated”, the expert argued that “neither the phrase“ subject to ”in the preamble of the certificates, nor the dollar amount indicated in the provision“ reinsurance accepted ” of the certificate would not have been understood in the industry to provide … a specific exception [to the presumption of concurrency] or an overall “cap” on the reinsurer’s exposure. Username. at 289, 295 (Hall Statement 2, 20). The other Century experts agreed. See username. at 347 (Manning Statement ¶ 45) (“Any competent and experienced insurer or reinsurer would understand that the fact that reinsurance is ‘subject to’ limits does not tell you whether expenses are payable over limits, within limits or not. at all.”); username. at 360 (Lyew’s Statement ¶ 28) (“[T]there is no language in the certificates that would be understood by a reinsurance underwriter to identify a reinsurance limit or ceiling regardless of how the reinsured policy is applied. “); identifier. to 380 (Thomson Declaration ¶ 13) (“[T]Reinsurance Provision accepted [does not establish non-concurrency with respect to defense costs] because it is silent as to whether the amount of reinsurance assumed is costs included or excluded. “).
The second circuit added that:
Century experts have offered another, perhaps even more fundamental, reason why the reinsurance industry operates under a presumption of competition. As Century experts explained, “[i]It is well known and universally understood in the insurance and reinsurance industry that “the premium follows the risk” ” username. at 306 (Hall Statement ¶ 58), which means that “he who takes the risk will get the premium for it”, id. at 346 (Manning Declaration ¶ 40). This principle requires competition in the treatment of defense costs because otherwise, as one expert explained, the ceding company “would end up with gaps in coverage and it would potentially end up retaining the risk for its own account even if it had paid. to reinsurers all the premiums associated with this risk. Username. at 300-01 (Hall Statement ¶ 37). The market would not be able to support such a “disparity of exposure” between cedants and their reinsurers: “[n]the ceding company would accept [such] gaps in coverage while paying the full premium to reinsurers, “”[o]other reinsurers on the same layer would never accept more exposure for the same premium that a reinsurer receives for less exposure, ”and“ insurers would not buy coverage with that kind of spread. Id. At 306 (Hall Statement ¶ 56). It is therefore not surprising that in the proceedings before the district court, “neither Global, neither its fact witnesses nor its expert witnesses [could] username[y] any… case in which a reinsurer, before Bellefonte, asserted Global’s position in this matter. ” Username. at 382 (Thomson statement ¶ 18).
However, it’s important to understand that the Second Circuit decision just means one size fits all. After all, on July 29, 2021, the Second Circuit, in Utique Mut. Ins. Co. v. Munich Reinsurance Am., examined the language of ceding policy and optional certificates to arrive at a result in favor of reinsurers.
The lesson from this odyssey is that ceding companies and reinsurers alike are well served by expressly addressing the treatment of expenses at the time of placement and ensuring that the language matches the desired outcome. This is because many newer vintage reinsurance contracts contain updated or different language from that traditionally found in optional certificates.
The parties should carefully consider at the time of placement the mode of resolution (that is to say., arbitration or litigation) and choice of law. While arbitration is preferred, resort to decades-old independent arbitration provisions is a pending problem because, typically, arbitration provisions in reinsurance contracts require the panel to deal with the contract. reinsurance as an “honorable obligation” and allows them to ignore applicable law. While this does not give the panel permission to rewrite the parties’ agreements, getting an arbitral award overturned is like hitting a home run against hurricane-force winds.Bellefonte Reinsurance Co. v. Aetna Casualty & Sur. Co., 903 F.2d 910 (2d Cir. 1990). Global Reinsurance Corp. of Am. v. Century Indem. Co., no.20-1476, at pp. 6 & 23 (2d Cir. 28 Dec. 2021) (citations omitted) (“Opinion 2021”). Global Reinsurance Corp. of Am. v. Century Indem. Co., 890 F.3d 74 (2d Cir. 2018). Global Reinsurance Corp. of Am. v. Century Indem. Co., 30 NY3d 508, 69 NYS3d 207 (NY 2017). Global Reinsurance Corp. of Am. v. Indemnity of the century. Co., 442 F. Supp. 3d 576, 592 (SDNY 2020). Notice 2021 at 28-29. Identifier., at 29-30. Utique Mut. Ins. Co. v. Munich Reinsurance Am., 7 F.4th 50 (2d Cir. 2021). The decision in Mutual of Utique is discussed at length in E. Lenci, “The Continued Rise Of The New York Convention And The Fall Of The ‘Bellefonte Cap,'” Arbitrate.com, September 8, 2021 (https://arbitrate.com/the-continued-rise-of-the-new-york-convention-and-the-fall-of-the-bellefonte-cap/ (originally published by Hinshaw’s Outlook for insurers, 20 August 2021)).