Pacific Employers Ins’ Co. v. Global Reins. Corp. of America

Issue Discussed: Allocation

Submitted by Michele L. Jacobson, Esq., Seema A. Misra Esq.

Date Promulgated: April 23, 2010

Issues Decided: Whether the language of a facultative certificate referring to a limitation on liability applied to expenses incurred by the cedent.

In Pacific Employers Ins. Co. v. Global Reins. Corp. of America, the United States District Court for the Eastern District of Pennsylvania considered the effect of language referencing a limitation of liability in a facultative certificate (the “Facultative Certificate”) issued by Global Reinsurance Corporation of America (“Global”) to Pacific Employers Insurance Company (“PEIC”). The Facultative Certificate reinsured an umbrella commercial liability policy that PEIC had issued to the Buffalo Forge Company. PEIC’s Complaint, alleging breach of contract and seeking a declaration of rights under the Facultative Certificate, alleged that Global “owe[d] PEIC $ 559,072 under the Facultative Certificate for its share of defense and indemnity payments in connection with the underlying asbestos claims against Buffalo Forge.” Global’s Answer asserted a counterclaim seeking a declaration that $1 million was the maximum that PEIC could recover under the Facultative Certificate in connection with the asbestos litigation liabilities. The parties filed cross-motions for judgment on the pleadings on Global’s counterclaim. PEIC asked that the Court find, as a matter of law, that Global was obligated for up to $1 million of loss and, in addition, a pro rata share of expenses. Global asserted that the $1 million limit of liability was a total cap of liability, applicable to both the loss and expenses. The Court granted Global’s motion and denied PEIC’s motion.

The Court’s decision first stated that the parties agreed that language in the Facultative Certificate’s Declarations page imposed a cap of $1 million but that the parties disagreed whether “ that cap encompasses expenses or excludes them.” Pacific Employers Ins. at *9. To address this issue, the Court cited the “Reinsurance Accepted” section in the Declarations page, which was phrased as follows: “$1,000,000 ANY ONE OCCURRENCE AND IN THE AGGREGATE…” The Court held that “this broad and unambiguous language clearly encompasses expenses because it defines Global’s maximum exposure under the Facultative Certificate.” Id. The Court further held that its interpretation was supported by the following language in the Facultative Certificate’s Conditions section, Paragraph E, despite PEIC’s argument to the contrary:

      All loss settlements made by the Company, provided they are within the terms and conditions of this Certificate of Reinsurance, shall be binding on the Reinsurer.

Upon receipt of a definitive statement of loss, the Reinsurer shall promptly pay its proportion of such loss as set forth in the Declarations. In addition thereto, the Reinsurer shall pay its proportion of expenses (other than office expenses and payments to any salaried employee) incurred by the Company in the investigation and its proportion of court costs and interest on any judgment or award, in the ratio that the Reinsurer’s loss payment bears to the Company’s gross loss payment . . . .

(emphasis added by PEIC). Although PEIC argued the emphasized language created two separate obligations and exclude the payment of expenses from the $1 million liability limit set forth in the Declarations page, the Court held that this language in Paragraph E “does not outline limits of liability, but merely outlines the two separate proportions of losses and expenses that Global is obligated to pay pursuant” to the Facultative Certificate. The Court stated that if the “parties intended to exclude expenses from this total liability limit, they could have made that clear in some section of the [Facultative] Certificate,” including the paragraph highlighted by PEIC. Id. at *12.

The Court found further support for its interpretation in the preamble paragraph to the Facultative Certificate’s Conditions page. The preamble paragraph stated that it was applicable to all paragraphs of the “Conditions” page and stated : “In consideration . . . of the premium, and subject to the terms, conditions and limits of liability set forth herein and in the Declarations made a part thereof, the Reinsurer does hereby reinsure the ceding company named in the Declarations . . . in respect of the Company’s policy(ies) as follows.” Id. at *12 (emphasis by Court). The Court held that this sentence made clear that Global’s reinsurance obligations, including those outlined in Paragraph E, are “subject to” the “terms, conditions, and limits of liability” contained in the Declarations and on the “Reinsuring Agreements and Conditions” pages. Noting that the only limit of liability in the Facultative Certificate was the $1 million limit found in the Declaration page, the Court held that Global’s maximum exposure was inclusive of expenses. In concluding, the Court noted that the case was “similar” to the Second Circuit’s ruling in Bellefonte Reinsurance Company v. Aetna Casualty and Surety Company, 903 F.2d 910 914 (2d Cir. 1990), in which the Second Circuit had considered similar contract language.

* Michele L. Jacobson and Seema A. Misra are partners in the litigation department of Stroock & Stroock & Lavan, L.L.P., concentrating on insurance and reinsurance litigation and arbitration. They have represented ceding companies, reinsurers, retrocessionaires, liquidators and intermediaries in a vast array of matters in state and federal courts, as well as before arbitration panels throughout the country.