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Ruling on a matter of first impression, a Pennsylvania Superior Court ruled that facultative reinsurance certificates provide coverage for defense expenses in excess of the liability cap set forth in the reinsurance agreement.  Century Indem. Co. v. OneBeacon Ins. Co., 2017 WL 4639578 (Pa. Super. Ct. Oct. 17, 2017).

Century and Pacific Employers issued excess policies to companies named in asbestos-related lawsuits.  The policies included coverage for defense costs.  The Century and Pacific Employers policies were reinsured under certificates issued by OneBeacon’s predecessor.  The current litigation arose when OneBeacon refused to pay the insurers under the facultative certificates.  While the litigation was pending, OneBeacon paid the limits listed in the “Reinsurance Accepted” provision, but refused to pay any amount above that for defense costs.  In ensuing litigation, a Pennsylvania trial court denied OneBeacon’s summary judgment motion as to liability limits, finding that the certificates were ambiguous as to whether the “Reinsurance Accepted” amount applied only to losses or to both losses and defense expenses.  Following a non-jury trial, the trial court entered judgment against OneBeacon.  The appellate court affirmed.

The “Reinsurance Accepted’ provision states that “the liability of the Reinsurer . . . shall follow that of the Company and except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of the Company’s policy.”  OneBeacon argued that under Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990) and its progeny, this language provides a cap for both indemnity and defense costs.  The appellate court disagreed, emphasizing a variation in the policy language at issue in Bellefonte.  There, the clause stated that the reinsurance is “subject to the terms, conditions and amount of liability set forth herein,” whereas here, the “subject to” clause refers only to the general conditions, not the reinsurance limit. 

In addition, the court noted that its ruling was supported by the follow form provision because Century’s and Pacific Employers’ underlying policies provided coverage for expenses in addition to limits.  The court stated:  “absent language providing the entire certificate is ‘subject to’ the ‘Reinsurance Accepted’ amount, a reasonable interpretation of the language is that where the underlying policy covers expenses in addition to liability limits, the reinsurance certificate provides the same coverage.”

As the court noted, two other courts have distinguished Bellefonte based on variations in policy language and deemed facultative certificates ambiguous as to whether expenses were excluded from the reinsurance limits of liability.  See Utica Mut. Ins. Co. v. Munich Reinsurance Am. Inc., 594 F. App’x 700 (2d Cir. 2014) (discussed in our December 2014 Alert); Utica Mut. Ins. Co. v. R & Q Reinsurance Co., 2015 WL 4254074 (N.D.N.Y. 2015) (discussed in our June 2015 Alert).  Further, as discussed in our December 2016 Alert, the New York Court of Appeals has accepted a certified question to address whether the dollar amount provided in a “Reinsurance Accepted” section of a reinsurance certificate applies to both losses and expenses.  Global Reinsurance Corp. of Am. v. Century Indem. Co., 843 F.3d 120 (2d Cir. 2016).