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When Interpreting Insurance and Reinsurance Contracts Under New York Law, Don’t Presume Anything

Many lawyers are in love with presumptions and rules of construction. We learn them in law school and then try to apply them to the real world. Courts also love presumptions and rules of construction. Judicial decisions are replete with the application of various presumptions and rules used to resolve disputes before the courts.

In the world of insurance and reinsurance disputes, presumptions and rules of construction often play a major role. Both courts and arbitrators regularly resolve disputes based on presumptions and rules. For example, one well-known rule of construction frequently, but not always, applicable to insurance coverage disputes between policyholders and their insurers is the rule of contra proferentem. This rule of construction requires in certain cases that the court construe ambiguities in an insurance policy strictly against the insurer and in favor of the policyholder. Contra proferentem is just one example among many presumptions and rules that may be applicable to insurance and reinsurance disputes.

As various presumptions and rules of construction develop in one jurisdiction or for one type of insurance contract, trial courts and commentators often extrapolate them to other jurisdictions or types of contracts. Courts and commentators assume that the same presumption or rule of construction applies in analogous circumstances without questioning deeply enough whether under that jurisdiction's law there is, in fact, a legal presumption or rule of construction actually applicable.

Two presumptions or rules that often come up in insurance and reinsurance disputes are: (a) whether a particular jurisdiction follows an "all sums" or "pro rata" approach when allocating insurance policies across multiple years of a continuing exposure case; and, (b) whether the liability limit set forth in a certificate of facultative reinsurance is an all-inclusive cap on a reinsurer's liability to the ceding insurer under the certificate.

For the first issue, commentators, litigants and courts often assume that jurisdictions have bright-line rules of construction or presumptions that make those jurisdictions either "all sums" or "pro rata" jurisdictions. For the second issue, a similar effect occurs where those same constituents assume that a jurisdiction follows or does not follow the so-called "Bellefonte" rule.1

In two recent and important decisions issued by the New York Court of Appeals–New York's highest court–presumptions and rules of construction were assumed to exist by the litigants, commentators and lower courts. It turned out that the Court of Appeals had a different view.

All Sums or Pro Rata

In asbestos, environmental and other "long-tail," continuing injury insurance coverage cases courts regularly struggle with whether to allocate the underlying settlements to the applicable insurance policies on an "all sums" or "pro rata" basis. The question is what insurance policies are triggered and in what manner.

The "all sums" approach essentially treats the insurance policies as though they were issued on a joint and several basis. "This theory of allocation 'permits the insured to collect its total liability . . . under any policy in effect during the periods that the damage occurred,' up to the policy limits."2 The "pro rata" allocation approach limits an insurer's liability to sums incurred by the policyholder during the policy period.3

In a complex case involving long-standing asbestos exposure with insurance coverage spanning from 1972 to 1985, the New York Court of Appeals4 addressed two certified questions from the Delaware Supreme Court.5 The first certified question was whether the "all sums" or "pro rata" allocation approach applied.

Rather than apply a presumption or rule of construction, the court answered the certified question by stating that under New York law, "the contract language of the applicable insurance policies controls each of these questions . . . ."6 The court explained that its conclusion in Consolidated Edison of New York v. Allstate Insurance Co.7, which found in favor of "pro rata" allocation, was not a blanket adoption of a strict rule mandating "pro rata" allocation, but was based on general principles of contract interpretation based on the controlling contract language.8 The court stated that like other agreements, insurance contracts should be enforced as written and must be interpreted according to common speech and consistent with the reasonable expectations of the average insured.9

The court explained that its decision in Consolidated Edison turned exclusively on the interpretation of two phrases in the insurance policies, which when construed as contracts must be construed, supported the court's finding that "pro rata" allocation applied.10 The court recognized in Consolidated Edison that different policy language might compel all sums allocation.11

In Viking Pump, the court found that different policy language and held that the language in these policies favored an "all sums" allocation.12 The court's reading of the non-cumulation clauses contained in the relevant policies made application of "pro rata" allocation illogical.13 Because the non-cumulation clauses would be rendered surplusage under a "pro rata" allocation–"a construction that cannot be countenanced under our principles of contract interpretation"14–the court had to enforce these clauses by applying an "all sums" allocation.

Essentially, what the New York Court of Appeals was saying is don't assume that because we decided "pro rata" allocation was appropriate under one set of contract provisions that we created a presumption or rule of construction.

Bellefonte – Is the Limit of Liability in a Facultative Certificate a Cap?

Since the 1990 decision by the Second Circuit Court of Appeals in Bellefonte Reinsurance Co. v. The Aetna Casualty and Surety Co.15, many courts and commentators have assumed that in New York and elsewhere, a facultative certificate's limit of liability stood as an all-in cap on the reinsurer's ultimate liability under the certificate. That assumption was enhanced by subsequent decisions in both federal and state courts in New York and throughout the country. In particular, the New York Court of Appeal's decision in Excess Insurance Co., Ltd. v. Factory Mutual Insurance Co.16, led some courts to conclude that Excess established a rule that third-party defense costs under any facultative reinsurance contract are unambiguously or presumptively capped by the liability limits in the certificate.17

In a recent decision by the New York Court of Appeals, that conclusion was disavowed and the court flatly rejected the existence of any presumption or rule of construction.18 In Global Reinsurance Corporation of America v. Century Indemnity Co.19, the New York Court of Appeals received a certified question from the Second Circuit on whether Excess imposed 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 regardless of whether the underlying reinsured policy is understood to cover defense costs.20

The New York Court of Appeals answered the Second Circuit's certified question in the negative. No, said the court. "Under New York law generally, and in Excess in particular, there is neither a rule of construction nor a presumption that a per occurrence liability limitation in a reinsurance contract caps all obligations of the reinsurer, such as payments made to reimburse the reinsured's defense costs."21

The court explained that, in Excess, it focused on the limited context of that case and the specific contract wording and was not faced with the question of whether there was some blanket rule or presumption. "Critically, we did not read the limit clause in isolation, but in light of the entire agreement as an integrated whole, 'giv[ing] meaning to every sentence, clause and word' thereof" (citations omitted)22. The court also noted that the expenses in Excess were incurred in coverage litigation and as not as third-party defense costs, so the issue of whether the following form clause subjected the reinsurer to the same terms as the original policy so as to require the reinsurers to cover defense costs in excess of the limit was not at issue.

To be clear, the court stated, "[w]e hold definitively that Excess did not supersede the 'standard rules of contract interpretation' . . . otherwise applicable to facultative reinsurance contracts." (Citation omitted).23 The court read Excess in harmony "with the traditional rules of contract interpretation reiterated numerous times by this Court."24 The court concluded, "New York law does not impose either a rule, or a presumption, that a limitation on liability clause necessarily caps all obligations owed by a reinsurer, such as defense costs, without regard for the specific language employed therein."25 This means that New York courts have to look at the words and context of the specific contract, read it in harmony as a whole, and determine on a specific basis whether defense costs are payable outside the facultative certificate's liability limit.

Conclusion

Both these New York Court of Appeals decisions teach us that insurance and reinsurance contracts are to be construed based on their terms in the context of the entire agreement. Notably, The court cited Viking Pump in Global Reinsurance for the proposition that courts must look to the language of the policy above all else.26 Presumptions and rules of construction, at least under New York law, cannot supplant the actual words of an insurance or reinsurance contract and how those words work together with the contract as a whole.


  1. Bellefonte Reins. Co. v. The Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990).
  2. In re Viking Pump, Inc., 27 N.Y.3d 244, 255 (2016) (quoting Roman Catholic Diocese of Brooklyn v. National Union Fire Ins. Co. of Pittsburg, Pa., 21 N.Y.3d 139, 154 (2013) (quoting Consolidated Edison of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 222 (2002).
  3. In re Viking Pump, Inc., 27 N.Y.3d at 256 (citations omitted).
  4. Id. at 244.
  5. In re Viking Pump, Inc., 146 A.3d 1046 (Del. 2015).
  6. In re Viking Pump, Inc., 27 N.Y.3d at 250.
  7. Consolidated Edison of N.Y. v. Allstate Ins. Co., 98 N.Y. 2d at 221-22.
  8. In re Viking Pump, Inc., 27 N.Y. 3d at 257.
  9. Id. (citations omitted).
  10. Id. at 258.
  11. Id. (citing Consolidated Edison of N.Y. v. Allstate Ins. Co., 98 N.Y.2d at 223).
  12. Id. at 258-64.
  13. Id. at 261.
  14. Id. (citations omitted).
  15. Bellefonte Reins. Co. v. The Aetna Cas. & Sur. Co., 903 F.2d at 910.
  16. Excess Ins. Co., Ltd. v. Factory Mut. Ins. Co., 3 N.Y.3d 557 (2004).
  17. Global Reins. Corp. of Am. v. Century Indem. Co., 30 N.Y.3d 508, 516 (2017).
  18. Id.
  19. Id.
  20. Id. at 512.
  21. Id.
  22. Id. at 517-18.
  23. Id. at 518.
  24. Id.
  25. Id. at 519.
  26. Id.