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Travelers Cas. & Sur. Co. v. ACE American Reins. Corp.

Issue Discussed: Allocation

Submitted by Robert A. Kole

Date Promulgated: October 18, 2006

Issue Decided: Whether a three-year facultative certificate provided three annual aggregate limits or one three-year aggregate limit (i.e. whether the certificate limits should be annualized).

In Travelers, ACE American Reinsurance Co. (“ACE”) issued three, three-year facultative certificates (the “Certificates”) to Travelers Casualty and Surety Co. (“Travelers”). The Certificates each reinsured a three-year excess insurance policy issued by Travelers (the “Travelers Policies”). The parties agreed that the Travelers Policies each provided annual aggregate limits (i.e. one full limit for each year of the three-year policy). They disagreed, however, as to whether the Certificates’ aggregate limits applied on an annual basis, or whether a single aggregate limit was available for the Certificates’ entire three-year term.

In resolving the dispute, both the District Court and the Court of Appeals focused primarily on two provisions of the Certificates. The first was the “follow form” clause, which provided: “the liability of the Reinsurer (ACE) specified in Item 4 of the Declarations shall follow that of the Company (Travelers) and, except as otherwise specifically provided herein, shall be subject in all respects to the terms and conditions of the Company’s policy.” The second was Item 4 of the Certificates’ Declarations page, which stated that the limits applied on an “each occ.-agg.” basis.

Relying primarily on the “follow form” clause, Travelers argued that there was a “clear intent” by the parties to have the terms of the Certificates mirror the terms of the underlying Travelers Policies, including the Policies’ annual aggregate limits. ACE argued that Item 4 of the Certificates unambiguously provided a single aggregate limit for the three-year coverage period, citing to the lack of the word “annual” in the Certificates and the case law generally prohibiting annualization of limits absent express annualization language in the relevant contracts. The parties filed cross-motions for summary judgment in the District Court, which granted Travelers’ motion and denied ACE’s. ACE appealed to the Second Circuit Court of Appeals.

In a two-page opinion, the Second Circuit affirmed the District Court’s ruling. The Court concluded that, when a reinsurance contract contains a “follow form” clause, concurrency is presumed between the terms and conditions of the reinsurance contract and the policy it reinsures, absent explicit limitations in the reinsurance contract itself. The Court stressed that this presumption of concurrency was not mandated as a matter of law, but rather as “a matter of simple contract construction,” relying on the “follow form” language. The Court also noted that the use of the phrase “each occ. – agg.” contained in Item 4 of the Certificates, which described the Certificate limits, was identical to the description of the limits of the underlying Travelers Policies contained in Item 2 of the Certificates, further supporting the Court’s view that the limits were designed to apply concurrently. The Court therefore concluded that the Certificates did not “otherwise specifically provide” that their limits would apply on a different basis than the limits of the Travelers Policies – annually.

*Robert A. Kole is a partner in the Insurance and Reinsurance Practice Group of the Boston law firm of Choate, Hall & Stewart LLP, where he represents ceding companies, reinsurers and intermediaries in a wide variety of insurance and reinsurance disputes.