Court of Appeals Rules: Specific Contract Language Governs Reinsurance Liability Cap

The issue that has recently plagued the insurance world is the question of whether New York State law requires in its insurance contracts a rule of construction or presumption regarding the contract’s liability limitations and caps on the reinsurance available to cover defense costs.

In a recent Court of Appeals decision in New York, it was found that, for reinsurance contracts, the standard rules of contracts apply. These rules essentially held that the language in the contract—which is agreed upon by both parties—is what determines the payments and caps on liability in reinsurance contracts. Therefore, the amount of insurance offered for defense costs in a contract will be decided on a case-by-case basis while also abiding by the general rules of contracts.

This ruling proves useful in solving disputes involving facultative reinsurance; insurers tend to seek reinsurance from other insurers as a sort of insurance for insurance companies. Multiple insurance companies share the risk by purchasing part or all of an insurance policy from another insurance company to prevent total losses and allows them to provide policies to more customers. It also helps to lessen an insurance company’s direct risk and prevents it from holding a total obligation to pay a large insurance claim.

Facultative reinsurance is usually outlined in a certificate that acts as a contract and defines the maximum limit of coverage, commonly referred to in contracts as the “Reinsurance Accepted.” It also determines whether this cap includes both indemnity payments and defense costs or one or the other.

The question that has been debated in several levels of the New York Court system is what exactly is included in the limitations and what rule determines how much one insurance company is required to pay to another. This issue arises when an insured makes a claim and both insurance companies find themselves having to pay a large sum.

The Court clarified this question by asserting that previous cases did not determine that the third-party defense costs under any facultative reinsurance contract are capped by the liability limits in the certificate. Furthermore, the Court held that reinsurance contracts “are governed by the same principles that govern contracts generally…[and] like any other contract, depends upon the intention of the parties, to be gathered from the words used, taking into account, when the meaning is doubtful, the surrounding circumstances.”

Essentially, it was decided that there is no rule or presumption that a reinsurance contract per occurrence liability cap limits a reinsurer’s obligations, including defense costs. These reinsurance contracts must follow the same principles that govern contracts in general.

The Court decided that the liability cap would be determined by the specific contract language and that the court has the obligation to analyze the language of the policy, applying the rules individually and specifically rather than using a “blanket rule” to carry out a policy.  The Court ruled that no presumption or “blanket rule” exists when it comes to facultative reinsurance and that the language in the contract is what will ultimately decide the liability cap and how much each insurer must pay.

If you have questions regarding coverage issues or your obligations under an insurance contract, contact the New York insurance defense attorneys at Montfort, Healy, McGuire, & Salley LLP by calling 800-240-4082.