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Global Reinsurance Corporation of America v. Century Indemnity Co.

New York Court of Appeals

December 14, 2017

Global Reinsurance Corporation of America, successor in interest to Constitution Reinsurance Corporation, Respondent,
v.
Century Indemnity Company, successor in interest to CCI Insurance Company, successor in interest to Insurance Company of North America, Appellant.

          Jonathan D. Hacker, for appellant.

          David C. Frederick, for respondent.

          Continental Casualty Company, et al.; Aon Benfield U.S., et al., amici curiae.

          FEINMAN, J.

         The narrow issue before us pertains to the scope of our prior ruling in Excess Insurance Co. Ltd. v Factory Mutual Insurance Co. (3 N.Y.3d 577');">3 N.Y.3d 577 [2004]). Pursuant to Rule 500.27 of this Court, the United States Court of Appeals for the Second Circuit has certified the following question to us:

         "Does the decision of the New York Court of Appeals in [ Excess ] 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?" (Global Reinsurance Corporation of America v Century Indemnity Company, 843 F.3d 120, 128 [2d Cir 2017]) [1]. We now answer the certified question in the negative. Under New York law generally, and in Excess in particular, there is neither a rule of construction nor a presumption that a per occurrence liability limitation in a reinsurance contract caps all obligations of the reinsurer, such as payments made to reimburse the reinsured's defense costs.

         I.

         Reinsurance is the insurance of one insurer by another (see Matter of Union Indem. Ins. Co. of N.Y., 89 N.Y.2d 94, 105-106 [1996]). "When entering into a reinsurance contract, an insurance company agrees to pay a particular premium to a reinsurer in return for reimbursement of a portion of its potential financial exposure under certain direct insurance policies it has issued to its customers" (Travelers Cas. & Sur. Co. v Certain Underwriters at Lloyd's of London, 96 N.Y.2d 583, 587 [2001]). "Through this indemnity relationship, the reinsured seeks to 'cede' or spread its risk of loss among one or more reinsurers" (id.). Through this process, reinsurance permits the cedent insurer to "minimize its exposure to catastrophic loss, " "reduce the amount of the legally required reserves held for the protection of policyholders, " and "increase [its] ability to underwrite other policies or make other investments" (Matter of Midland Ins. Co., 79 N.Y.2d 253, 258 [1992]).

         There are two types of reinsurance: treaty and facultative. Under a reinsurance treaty, the cedent transfers to the reinsurer its risk under an entire line of business spanning multiple insurance policies (see Travelers, 96 N.Y.2d at 587-588; Sumitomo Marine & Fire Ins. Co., Ltd.-U.S. Branch v Cologne Reinsurance Co. of America, 75 N.Y.2d 295, 301 [1990]). By contrast, in facultative reinsurance, the reinsurer agrees to indemnify the cedent for all or a portion of the cedent's risk under a single policy in the event of loss (see 1A Couch on Ins. § 9:3 [3d ed. 2016]; Travelers, 96 N.Y.2d at 587). In other words, "[f]acultative reinsurance is policy-specific" (Travelers, 96 N.Y.2d at 587). For purposes of this certified question, we are concerned only with facultative reinsurance. [2]

         The coverage provided under a facultative reinsurance contract is "memorialized in a certificate" (Barry R. Ostrager & May Kay Vyskocil, Modern Reinsurance Law and Practice § 1:03 [3d ed. 2014]; accord William Hoffman, Facultative Reinsurance Contract Formation, Documentation and Integration, 38 Tort Trial & Ins Prac L J 763, 809 [Spring 2003] ["By a certificate, the reinsurer attests that the facultative reinsurance placement is complete and the contract in effect"]). These certificates are usually "standard forms" (North River Ins. Co. v CIGNA Reinsurance Co., 52 F.3d 1194, 1199 [3d Cir 1995]), "short and concise, using terms of art rather than lengthy, legalistic explications to define the obligations of the parties" (Ostrager & Vyskocil, § 2:02; see Sumitomo, 75 N.Y.2d at 302).

         Typically, the facultative reinsurer is obligated to indemnify the cedent up to a stated upper limit (see Travelers, 96 N.Y.2d at 588). For example, one of the certificates relevant to the underlying dispute, which the parties refer to as "Certificate X, " reads:

"Item 1 - Type of Insurance
Blanket General Liability, excluding Automobile Liability as original.
Item 2 - Policy Limits and Application
$1, 000, 000. each occurrence as original.

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