For Whom Does BELLEFONTE Toll? It Tolls For Thee

A commentary article reprinted from the August 13, 1998 issue of Mealey's Litigation Report:

Reinsurance

In a recent issue of Mealey's Litigation Report: Reinsurance, (1) P. Jay Wilker and Edward K. Lenci lamented that they are tired of hearing Bellefonte (2) invoked by reinsurers representing cedants. This commentary is intended to explain to those bewildered by its persistence or disbelieving of its impact the meaning of Bellefonte and its progeny. Although we and some of our cedant clients may not like it (some reinsurer clients do like it), Bellefonte and its offspring appear to be here to stay.

We discussed Bellefonte and its most recent issue in "Bellefonte Lives," a commentary in the September 24, 1997 edition of Mealey's Litigation Report: Reinsurance. (3) Based solely on a textual interpretation of the language of the certificates at issue, Bellefonte held that facultative certificate limits cap reinsurance coverage for both indemnity and expenses (the "Bellefonte Rule"). (4) As noted in our previous article, this holding has been roundly criticized in the reinsurance industry. Critics have argued that the Second Circuit ignored extrinsic evidence indicating that the reinsured policies covered expenses only within policy limits. Moreover, the critics claim that endorsements to come (but not all) of the facultative certificates specifically provided that the limits under those certificates were cost-inclusive. Commentators also criticized the Second Circuit for rendering a decision that was utterly at odds with decades-old custom and practice.

We pointed out, however, that the Court in Bellefonte interpreted the form language of the certificates at issue based solely on the record presented to it by both parties on cross-motions for summary judgment. Since the reinsurers did not rely on the underlying policies' cost-inclusive coverage or on any cost-inclusive endorsements to any certificates, neither did the Court. Nor did either party submit evidence of custom and practice because reliance on such evidence would have precluded summary judgment. Instead, both parties contended that the language of the certificate as clear and unambiguous. Thus, the Court did not refer to or consider any extrinsic evidence and based its decision solely on the form language in the facultative certificates. (5) As a result a number of commentators criticized the Court for making the right decision for the wrong reasons.

The resultant apprehension in the industry was that the Bellefonte Rule would be applied to the same certificate language in situations where the reinsured policy clearly covered expenses in addition to policy limits. This fear of Bellefonte was indeed justified by a decision rendered three years later in Unigard Security Insurance Co. v. North River Insurance Co. (6) This case involved reinsurance of a cost-supplemental policy and a reinsurer who conceded at trial that, prior to Bellefonte, it had interpreted its certificate to be cost-supplemental when reinsuring a cost-supplemental policy. (7) The certificate language in Unigard was almost identical to the language construed in Bellefonte. Thus, on its face Unigard was no more than an affirmation of Bellefonte, although it did involve reinsurance of a cost-supplemental policy. In that sense, Unigard was the dreaded misbegotten spawn of Bellefonte.

We concur with Wilker/Lenci's observation that Bellefonte is the law only in the Second Circuit, and that it may not even be controlling law in New York. We also agree that most arbitrators likely will ignore Bellefonte, even where the same parties and the same certificate language are involved. (8) We also are aware that many reinsurers, especially those writing new business and particularly those that are members of an insurance group that writes direct business, do not invoke the Bellefonte Rule for business reasons or to avoid taking a position inconsistent with the cedant side of the "house."

We disagree with Wilker/Lenci, however, in their castigation of facultative reinsurers who, according to their calculations, invoke Bellefonte "as if it were a magic talisman; that is, as if the Second Circuit case law were both a general rule of law divorced from whatever a particular facultative certificate might provide and [from] the supreme law of these United States." Of course, we do not know where these alleged certificates were written, or whether Second Circuit law might apply to such certificates. The simple fact is that Bellefonte may legitimately apply in some circumstances---reinsurers are peering over their shoulders. In fact, the reinsurer in Unigard felt compelled by its duties to retrocessionaires to invoke Bellefonte because it was decided in the very same jurisdiction, in the interim between the completion of pleadings and the beginning of trial.

While Wilker/Lenci pay homage to Bellefonte's careful analysis of the certificates' "subject to the amount of liability" language, they surprisingly do not discuss that language until nearly the end of their commentary. They do discuss earlier and at great length the language of the "following form" provisions of the certificates. This language is, however, entirely secondary to the Court's analysis of the "subject to the amount of liability" language in Bellefonte and in Unigard. In fact, the Court in Bellefonte found that the "subject to the amount of liability" language in the preamble governed the entire certificate." The Court in Unigard later construed the same language consistent with the Bellefonte analysis. (10)

There is no doubt that the Bellefonte Rule was based on the specific contract language in the facultative certificates at issue in Bellefonte. It was then applied in Unigard to the construction and interpretation of identical certificate language. In light of the decision rendered in Allendale Mutual Insurance Co. v. Excess Insurance Co., Ltd., (21) however, this restriction is no longer apparent. In fact, we find it rather curious that Wilker/Lenci dismissed the Allendale decision with a footnote describing it as "merely just another holding in the Second Circuit that a reinsurer's obligations are limited by the amount of liability expressed in the facultative certificate, so it does not impact our main point in this article." This casual dismissal of Allendale prompted this commentary.

While Wilker/Lenci comment that "the Court in Allendale seemed at one point to be leaning a bit toward elevating Bellefonte and Unigard to the level of a general rule divorces from whatever a particular facultative certificate might provide," the Court did nothing of the kind. The Court in Allendale focused on certain contract language almost identical to that in Bellefonte, but also deemed irrelevant several contractual differences. (12) By discounting these variations between the contract language in Bellefonte/Unigard and the language before it, the Court in Allendale dramatically broadened the scope of the Bellefonte Rule. This observation was the essence of our commentary in "Bellefonte Lives," but seems to be a point that completely eluded Wilker/Lenci.

Allendale is significant because it took an important step toward extending the reach of the Bellefonte Rule and increasing its impact on the reinsurance world. Because Allendale involved reinsurance of a property policy, rather than a liability policy that provided a defense for the insured, (13) and because the contract at issue lacked certain critical language contained in the Bellefonte and Unigard certificates, (14) Allendale clearly expanded the breadth of the Bellefonte Rule. Thus, it is not, as suggested by Wilker/Lenci, "merely just another holding in the Second Circuit"--it reaches farther than Bellefonte by applying its principles to a materially different contract. Moreover, Allendale involved interpretation of a London reinsurance slip rather than a standard form domestic facultative certificate. Thus, Allendale also has serious implications for reinsurance contracts written without arbitration clauses in London or on the Continent.

Wilker/Lenci's summary dismissal of Allendale is even more surprising, given the Court's careful review of the parties' arguments, especially those advanced on reargument. (15) Deliberately and carefully discussing the cedant's motion of reargument, the Court addressed arguments similar to Wilker/Lenci's -- that is, that the Bellefonte Rule should be strictly limited to its preculiar facts, i.e., the particular language of the certificates at issue. In its discussion of the facts distinguishing the London slip from the Bellefonte certificates, the Court seemed quite aware of the implications of applying Bellefonte to a somewhat different reinsurance contract. (16) In fact, the court conceded that the question presented was a novel one, predicted future litigation on the issue, and invited the plaintiff to appeal. (17)

Most telling about the Court's analysis in Allendale is its astute observation that the London slip was written after the Bellefonte decision and thus could have been clearly drafted in order to counteract Bellefonte's effect, had the cedant had the requisite intent. (18) This is one of many points in Allendale ignored by Wilker/Lenci. We do not know, of course, how many of their cedant clients who decry Bellefonte had the opportunity, but failed to insist on insertion of anti-Bellefonte language in the certificates they purchased.

Whether Allendale stands up on appeal remains to be seen. Because the reinsurers prevailed at trial on their entire defense, (19) if the Second Circuit affirms the judgment on appeal, (20) the Court will never reach the issue of coverage for expenses in addition to limits. Only if the ultimate decision in favor of the reinsurers were reversed, would be have the opportunity to learn whether the Second Circuit agrees that the Bellefonte Rule applies:

Wilker/Lenci did correctly point out that the decisions in Aetna Casualty & Surety Co. v. Philadelphia Reinsurance Corp., (21) and Penn Re. Inc., et al. V. Aetna Casualty & Surety Co, (22) conflict with Bellefonte. We found perplexing, however, Wilker/Lenci's reference to supposed confusion regarding the Third Circuit decision in North River Insurance Co., v. Cigna Reinsurance Co., (23) There is nothing at all confusing abut this aspect of the decision. In North River, the reinsurer initially disavowed any reliance on Bellefonte. (24) When it later attempted, in the wake of Unigard, to assert the Bellefonte Rule as a defense, the district court refused to allow it because it was untimely raised; that decision was affirmed on appeal. (25) The Third Circuit clearly did not, however, decide whether the Bellefonte Rule applied to the facultative certificate before it. (26) We note that both parties in North River did, however, agree before trial that New York law would govern the facultative certificates at issue. (27) Thus, if Bellefonte had been timely raised, the Third Circuit would have been required to determine whether Bellefonte truly represents New York law. The decision as it stands suggests that the Third Circuit would have answered the question in the affirmative, but we will never know for certain.

Perhaps Cigna could have argued, albeit at the eleventh hour, that Unigard acted as collateral estoppel against North River, as Bellefonte estopped Aetna in Aetna Casualty & Surety, (28) a decision rendered by the United States District Court for the Eastern District of Pennsylvania, which is in the Third Circuit. In Aetna, the Court ruled in favor of the reinsurer because in Bellefonte Aetna had litigated the same issue and lost. The Court there did not, however, adopt or agree with Bellefonte. In fact, the Court suggested in dictum that it disagreed with Bellefonte and found Penn Re more persuasive. (29) Nevertheless, this decision suggests that the district court in North River might have found that North River was collaterally estopped by Unigard without agreeing with, adopting, or deciding that Bellefonte and Unigard reflect New York law.

There is no doubt that Bellefonte is not the last word. At the same time, the Bellefonte Rule clearly is no longer restricted to the specific certificate language construed in that decision. In fact, such a narrow view of the Bellefonte Rule blindly disregards, the Allendale decision, which broadened the applicability of the Bellefonte Rule beyond reinsurance of a liability policy with particular facultative certificate language. As long as reinsurance contracts are written without Bellefonte in mind (and without arbitration clauses), and as long as disputes arising under those contracts are heard in the Second Circuit, (30) cedants will risk going bare for expenses in addition to limits. While some in the industry may wish to ignore or even bury Bellefonte, it is the law in one very important and well-regarded jurisdiction and it is not going to disappear. Cedants who insist on ignoring it do so at their peril.

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1. P. Jay Wilker & Edward K. Lenci, For Whom Bellefonte Tolls, 9 Mealey's Litig. Rep; Reinsurance (Mealey's) No. 2 (May 29, 1998.)
2. Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990). Aff'g No. 85 Civ. 2706, 1989 WL 106469 (S.D.N.Y. Sept. 5, 1989).
3. Michael H. Goldstein, Bellefonte Lives, 8 Mealey's Litig. Rep.; Reinsurance (Mealey's) No. 10 (September 24, 1997).
4. Bellefonte 903 F.2d at 913.
5. Id. At 912 (noting application of de novo review to district court's "pure textual constriction" of certificate language).
6. 4 F.3d 1049 (2d Cir. 1993).
7. Unigard 762 F. Supp. 566, 594-95 (S.D.N.Y. 1991).
8. In fact, we represented the reinsurer in the arbitration to which Wilker/Lenci refer, wherein the panel ignored Bellefonte although the dispute involved the same two parties and the very same certificate language. See also Lawrence O. Monin & Michael J. Brady, Updating Reinsurance Law Developments: The Gloves are Beginning to Come Off, 63 Def. Couns. J. 219, 223 (1996) (citing Gerling Global Reinsurance Corp. v. Aetna Cas. & Sur. Co., No. 94 Civ. 36 (S.D.N.Y.), as example of proceeding in which arbitrators have declined to apply Bellefonte rule to question of whether reinsurer is liable for expenses in excess of certificate limits.).
9. Bellefonte, 903 F.2d at 914
10. Unigard, 4 F.3d at 070-71.
11. 970 F. Supp. 265 (S.D.N.Y.)("Allendale I"), amended on reargument, 992 F. Supp. 271 (S.D.N.Y. 1997) ("Allendale II").
12. Allendale I. 970 F. Supp. At 270-71.
13. Id. At 271.
14. See id. The Court acknowledged, for example, the absence of "subject to the amount of liability" language, but found this difference unconvincing.
15. Allendale II, 992 F. Supp. At 273-75.
16. Id. At 276 (recognizing that cedant's arguments "required careful consideration because they raised what appeared to be a question of first impression").
17. See id. at 277.
18. Id.
19. See Allendale Mut. Ins. Co. v. Excess Ins. Co., Ltd., 992 F. Supp. 278 (S.D.N.Y. 1998) ("Allendale III").
20. Allendale on appeal urges the Second Circuit to reverse the partial summary judgment granted the reinsurers on the issue of expenses in addition to limits. See Appellant's Brief at 4, Allendale (No. 98-7521). Appellant presents to the Court the same reasoning that it advanced during reargument in Allendale II, i.e. that any reliance in this context on Bellefonte and Unigard is misplaced. In other words, appellant contends that there exist material differences between (1) the specific language in the Bellefonte/Unigard and Allendale certificates, and (2) property reinsurance and liability insurance policies in general. Id. at 4-42. Thus, Allendale argues that the Bellefonte Rule is inapplicable to the interpretation of the contract at issue.
21. The appellees' brief is due on August 14, 1998; oral arguments may be heard as early as the week of October 12, 1998.
    
    
22. No. 94-2683, 1995 WL 217631 (E.D. Pa. April 13, 1995), reconsideration denied. 1995 WL 338488 (E.D. Pa. June 6, 1995).
23. No. 85-395-Civ. 5, 1987 U.S. Dist. LEXIS 15252 (E.D.N.C. June 30, 1987), discussed in Aetna supra note 21, at *4.
24. 52 F.3d 1194 (3d Cir. 1995), rev'g North River, 831 F. Supp. 1132 (D.N.J. 1993).
25. North River, 52 F.3d at 1218.
26. Id. at 1219.
27. See id. at 1219-20. In fact, the Court denied reconsideration because it found the Unigard was not an intervening change in controlling law and, therefore, that Bellefonte could not be raised for the first time on appeal.
28. See id. at 1203, n.13.
29. 1995 WL 217631 at *4.
30. See id.
31. The reason that Allendale chose to file suit against the U.K. facultative reinsurers in the Southern District of New York---in the teeth of the Bellefonte Rule---is unclear.