Law capping reinsurers’ liability struck down by 2nd Circuit

The U.S. Court of Appeals for the Second Circuit on Tuesday found that the “Bellefonte rule” capping reinsurers’ liability is no longer the law in the circuit, more than two decades after the rule was laid out in the circuit’s 1990 ruling in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co.

In Tuesday’s ruling, the three-judge panel upheld U.S. District Judge Lorna G. Schofield of the Southern District of New York’s finding that Global Reinsurance Corporation of America must pay its share of Century Indemnity Company’s defense costs in excess of the reinsurance certificates’ liability limits.

“We base this conclusion on the certificates’ unambiguous language as well as the testimony of Century’s experts confirming that a strong presumption of concurrency prevailed in the reinsurance market at the time the certificates were issued,” wrote the panel, which included Judges Guido Calabresi, Rosemary Pooler and Steven Menashi.

The panel found that the holdings of Bellefonte and Unigard Security Insurance Co. v. North River Insurance Co. have been “undermined” by the New York Court of Appeals’ response to a certified question on the matter.

The Court of Appeals replied that reinsurance contracts are subject to ordinary rules of contract interpretation.

Because New York law does not impose “a rule of construction or a strong presumption that a reinsurance certificate’s liability limit caps the reinsurer’s liability with respect to both indemnity losses and defense costs regardless of whether the underlying policy being reinsured is understood to cover defense costs in excess of the policy’s liability limit,” Menashi wrote for the panel.

“To the extent that Bellefonte and Unigard suggest a different outcome, we conclude that those cases have been undermined by the decision of the New York Court of Appeals answering our certified question,” Menashi said. “For that reason, Bellefonte and Unigard no longer constitute the law of our circuit.”