Second Circuit Relegates Bellefonte to the Scrapheap

It is not every day that a federal circuit court of appeals admits that its prior decisions are no longer good law, but that has now happened in the Second Circuit. For decades, reinsurers and the courts relied on the Second Circuit’s holdings in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2d Cir. 1993), to cap a reinsurer’s liability under certificates of facultative reinsurance for indemnity and expenses. This reliance was sharply criticized by cedents and others in the industry.

Because the New York Court of Appeals, in responding to a certified question from earlier in the case discussed below, undermined the Second Circuit’s interpretation of facultative certificates under New York law, the Second Circuit has now made it clear that its decisions in Bellefonte and Unigard are no longer good law.

In Global Reinsurance Corp. of America v. Century Indemnity Co., No. 20-1476 (2d Cir. Dec. 28, 2021), the Second Circuit addressed an appeal from a district court judgment denying the reinsurer’s request for a declaratory judgment that the stated limits in 10 facultative certificates capped the reinsurer’s liability for both indemnity and expenses. In affirming, the court summarized the history of this case and Bellefonte, held that the certificates’ policy limits were not inclusive of defense costs, and announced that its earlier decisions on this subject were no longer good law.

The opinion contains a good discussion of the certificate and policy language, the analysis by the courts and the history of all the relevant cases. I won’t summarize that here. Below are some of the high points of the court’s decision.

The court, in affirming and holding that the reinsurer’s obligation to pay its proportionate share of the cedent’s defense costs was not capped by the certificates’ liability limits, concluded as follows:

Because the certificates do not specifically provide that the terms of [the reinsurer’s] reinsurance differ from those of the [cedent’s] policies with respect to the treatment of defense costs, the follow-form clause requires that [the reinsurer’s] payments toward [the cedent’s] defense costs be made in addition to the certificates’ limits. This conclusion follows not only from the unambiguous language of the certificates but also from evidence of custom and usage concerning the central importance of concurrency to the reinsurance market when the certificates were issued.

Notably, concerning Bellefonte and Unigard, the court explained that the New York Court of Appeals’ holding on the Second Circuit’s certified question:

. . . conflicts with our decisions in Bellefonte and Unigard, in which we held that the liability limits contained in the certificates at issue “necessarily cap[ped] all
obligations owed by [the] reinsurer[s], such as defense costs, without regard for the specific language employed therein.” . . . Because [the New York Court of Appeals decision] exposed a fundamental conflict between these precedents and “New York law as determined by the New York Court of Appeals,” which we are “bound to apply,” . . . , we are “require[d] to conclude” that Bellefonte and Unigard are “no longer good law.” (citations omitted).

The court, in affirming the district court, rejected the reinsurer’s argument that the certificate language was ambiguous and its interpretation of the follow-form clause.

[The reinsurer’s] analysis is flawed because it improperly subordinates the follow-form clause to the limitations on liability referenced in the preamble and contained the Reinsurance Accepted provision. That reading of the certificates is untenable in light of the plain language of the follow-form clause, which requires the opposite approach.

* * *

Among the “terms and conditions” of the [cedent’s] policies made binding on [the reinsurer] through the follow-form clause is a provision stating that [the cedent] “will pay, in addition to the applicable limit of liability … all expenses incurred by … the Insured in any suit defended by [the cedent] or by others with [the cedent’s] consent.” . . . Accordingly, [the reinsurer] must pay [the cedent’s] defense costs “in addition to the applicable limit of liability” contained in the Reinsurance Accepted provision unless the certificates “otherwise specifically provide[].” (citations omitted).

The court concluded its analysis stating that nothing in the certificates specifically provided that the certificates differ from the cedent’s policies concerning the payment of defense costs. The court agreed with the district court concerning the credibility of the cedent’s custom and practice experts, especially the testimony that non-concurrency would be expressly negotiated and would not be found in the standard text of the certificate and that there was a presumption of concurrency between facultative reinsurance and the reinsured policy. The court also accepted the experts’ testimony on the “premium follows risk” principle in insurance and reinsurance. Ultimately, the court held as follows:

[The cedent’s] evidence of industry custom thus confirms what is apparent from the unambiguous language of the certificates: [the reinsurer’s] reinsurance is concurrent with the [cedent’s] policies with respect to the treatment of defense costs. For that reason, [the reinsurer] must pay its proportionate share of those costs in addition to the applicable
liability limit for each respective certificate.

The bottom line: Bellefonte now resides in the scrapheap of wrongly-decided cases.