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Recent Treatment of Expense Claims Under Reinsurance Contracts

Blogs, Insurance Coverage

Disputes often arise between cedents and reinsurers over the treatment of expense in reinsurance contracts. Many contracts include coverage for a share of expenses paid by the cedent, such as those incurred in the investigation and settlement of claims or suits. Often, however, the precise nature of the covered costs is not made clear, nor is the relationship of the expense coverage to contract limits of liability. Numerous courts have addressed the issue of whether covered expenses are subject to the reinsurance contract limits. Fewer have considered what expenses are contemplated in a reinsurance coverage grant, and what expenses are not. 

The most cited case on the issue of expense is Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990), in which the Second Circuit held that defense costs paid by the cedent in addition to direct coverage limits were not payable under the reinsurance facultative certificate in addition to limits. In reaching this conclusion the court looked to the specific language of the reinsurance contract which provided in relevant part that the reinsurer was bound to pay its proportion of loss settlements, “subject to … the amount of liability set forth herein” and that “in addition thereto” the reinsurer was bound to pay “its proportion of expenses … incurred by the Company in the investigation and settlement of claims or suits.” The court found in this wording a strong expression of the parties’ intent to cap liability under the certificate at the express limit in the contract. As such, it rejected the cedent’s argument that the “in addition thereto” language triggered an additional limit for the expense and found instead that this language merely differentiated the obligations for losses and expenses.

Despite the express contractual basis for the Bellefonte decision, the case is often cited for the principle that there is a presumption in reinsurance contracts that limits of liability are expense-inclusive. The better reasoning is that each contract should be carefully evaluated based on the actual contract wordings. These wordings are many and varied and they do not all compel the same result.

Thus, in Utica Mutual Ins. Co. v. Munich Reinsurance America, Inc., No. 13-4170-CV, 2014 WL 6804553 (2nd Cir. Dec. 4, 2014), the Second Circuit reviewed a wording not all that different from the wording it considered in Bellefonte twenty-four years prior and concluded that it was ambiguous in terms of applicability of the contract limit of liability to expense. The language at issue obliged the reinsurer to “indemnify the [cedent] against losses or damages … subject to the reinsurance limits” and also rendered the reinsurer “liable for its proportion of allocated loss expenses incurred by the [cedent]”. The court distinguished Bellefonte on grounds that the Munich Rewording did not include the “in addition thereto” language, but deviated from Bellefonte primarily on the basis that expense was not expressly made subject to contract limits (which, of course, was the case in Bellefonte, as well). In any event, the court declined to presume that the contract limit applied to the expense and instead remanded the case for consideration of extrinsic evidence as to contractual intent.

Other courts that considered the expense issue in 2014 found contract language unambiguous in the creation of an overall limitation on the obligations to reinsure both loss and expense. In Continental Cas. Co. v. Midstates Reinsurance Corp., 2014 IL App (1st) 133090 (Dec. 16, 2014) an Illinois appellate court considered a wording very similar to the wording in Bellefonte and followed what it termed the “Bellefonteprinciple” that facultative reinsurance certificate limits cap reinsurance for both indemnity and expenses. A very similar analysis was employed in Utica Mutual Ins. Co. v. Clearwater Ins. Co., 6:13-cv-1178 (GLS/TWD), 2014 WL 6610915 (N.D.N.Y. Nov. 20, 2014) (certificate limit unambiguously applies to loss and expense, combined, consistent with Bellefonte holding) and in Global Reinsurance Corp. of America v. Century Indemnity Co., 1:13-cv-06577-LGS, 2014 WL 4054260 (S.D.N.Y. Aug. 15, 2014) (same). 

The Global Reinsurance case involved billings for underlying defense costs, as did Bellefonte. The expenses at issue in Continental Casualty and Utica Mutual v. Clearwater were not clearly identified in the decisions, but it seems that some of the cedents’ costs in contesting coverage in declaratory judgment actions were at issue, along with defense costs paid under the direct policies. Utica Mutual v. Munich Regives no indication of the type of expenses at issue. All but one of the reinsurance contracts considered in these cases limited covered expense to sums incurred by the cedent “in the investigation and settlement of claims or suits.” This language was not at issue in these cases, but it raises the interesting question of whether defense costs, declaratory judgment expense or both, were intended to be covered. Some in the industry assert that such language applies only to costs the cedent incurs in contesting coverage, while others assert that it is broad enough to encompass both coverage and defense costs. Likewise, courts have, in the past addressed certificates that cover “expense” generally, and reached different conclusions as to whether declaratory judgment expense is covered at all. See e.g., British Int’t Ins. Co. v. Seguros La Republica, S.A., 342 F.3d 78 (2d Cir. 2003) (certificate follows the underlying risks, which do not include DJ expense); Affiliated FM Ins. Co. v. Constitution Reins. Corp., 416 Mass. 839 (1994) (“expense” ambiguous such that extrinsic evidence of intent necessary). Again, the key to such inquiries is the actual contract language at issue – which should always be evaluated carefully when any claims involving expenses are at issue.