In a highly anticipated decision, the United States Court of Appeals for the Second Circuit has certified an important question of reinsurance law to the New York Court of Appeals. The appeal had amicus briefs from reinsurance intermediaries supporting the cedent’s argument that the so-called “Bellefonte” rule should not apply. We discussed this in an earlier blog post.

In Global Reins. Corp. of Am. v. Century Indem. Co., the Second Circuit was faced with a cedent’s appeal of a district court’s determination that the dollar amount stated in the “Reinsurance Accepted” section of certificates of facultative reinsurance unambiguously capped the amount the reinsurer was obligated to pay the cedent for both loss and expense combined. No. 15-2164-cv, 2016 U.S. App. LEXIS 21822 (2d Cir. Dec. 8, 2017). The district court’s determination was based upon the Second Circuit’s well-known precedents, Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049 (2d Cir. 1993).

What makes this opinion important and interesting is the court’s analysis of its precedent and its willingness to accept that there was validity to the cedent’s and amici’s arguments that Bellefonte and Unigard were wrongly decided. The court, after indicating that the brokers’ argument was “not without force,” stated that it “found it difficult to understand the Bellefonte court’s conclusion that the reinsurance certificate in that case unambiguously capped the reinsurer’s liability for both loss and expenses. Looking only to the language of the certificate, we think it is not entirely clear what exactly the “Reinsurance Accepted” provision in Bellefonte meant.” While the court did not suggest an outcome or whether it would overrule its precedents, the opinion, while certifying a question to New York’s highest court for resolution, for the first time outlined the competing arguments and the issues underlying them.

Because the question of how these fac certs should be interpreted is one of state law–here New York law–the court certified the question below to the New York Court of Appeals for an answer before resolving this appeal:

Does the decision of the New York Court of Appeals in Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 557 (2004), 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?

The interesting thing here is that the court did not limit the question to fac certs, but used the words “reinsurance contract” in describing the question. Second, the circuit court stated that by certifying this question “we do not bind the Court of Appeals to the particular question stated. The Court of Appeals may modify the question as it sees fit and, should it choose, may direct the parties to address other questions it deems relevant.” The latter suggestion may give rise to the New York Court of Appeals giving consideration to evidence of custom and practice or pattern and practice between the cedent and the reinsurer.

Even more interesting is the circuit court’s analysis of its own decisions (both relied upon by the New York Court of Appeals in Excess). The opinion goes on to state that in neither Bellefonte nor Unigard did the court explain why the “Reinsurance Accepted” provision was an explicit limitation on liability. The court merely described the amount stated in that provision as a cap, but was never asked to adjudicate why it was a cap. The court noted that in Excess, the parties agreed that there was a liability cap in the fac cert and that the court never addressed the question of whether the stated limit represented an absolute coverage limit for losses and expenses combined. Because the Second Circuit was uncertain whether Excess imposed a rule or presumption on the cap issue, it was appropriate to ask the New York Court of Appeals to weigh in.

The final interesting point is that the New York Court of Appeals does not have to accept the certified question. Under Rule 500.27, “The Court, on its own motion, shall examine the merits presented by the certified question, to determine, first, whether to accept the certification and, second, the review procedure to be followed in determining the merits.” “If the certification is accepted, the Clerk of the Court shall request any additional papers the Court requires for its review.”

Typically, the briefing schedule will be: appellant’s brief to be filed 60 days after the court accepts the certification; respondent’s brief to be filed 45 days after the date set for the filing of appellant’s brief; and a reply brief, if any, to be filed 15 days after the date set for the filing of respondent’s brief.  Notably, the court welcomes motions for amicus curiae participation from those qualified and interested in the subject matter of these certified questions. You can bet that a few motions will be filed if the New York Court of Appeals accepts the certification. Stand by.