Contract Interpretation

In this putative class action, plaintiffs alleged unlawful practices related to mortgage insurance practices, including a violation of the Real Estate Settlement Procedures Act of 1974 (“RESPA”). This case was stayed pending ultimate resolution of a factually-similar case, Cunningham v. MT&T, on appeal in the Third Circuit. In both cases, the plaintiffs purchased primary mortgage insurance (“PMI”) from specific insurers, which in turn purchased reinsurance from their respective mortgagees’ captive reinsurance subsidiaries. Plaintiffs in both suits alleged that this scheme (between the mortgagee and the PMI insurer) violated RESPA’s anti-kickback and anti-fee splitting provisions between the mortgagee and the PMI insurer.

As we previously reported here, in 2016, the Third Circuit affirmed summary judgment in favor of the defendants in Cunningham, upholding its finding that plaintiffs’ claims were time-barred and that plaintiffs could not equitably toll the limitations period because they had not exercised reasonable diligence in investigating any potential RESPA claims within the statute of limitations.

The District Court for the Western District of Pennsylvania, like the Third Circuit in Cunningham, found significant that the homeowners were made aware of the captive reinsurance program through disclosures at the time of closing and did not elect to opt out, did not ask questions of the challenged scheme at or prior to closing, and did not investigate their mortgage until they were solicited by their current counsel. Moreover, the Court rejected the plaintiffs’ attempts to differentiate their case from Cunningham, which was decided at the summary judgment phase after limited discovery, and not, as in this case, on a motion for judgment on the pleadings. The Court went on to state, “[u]nfortunately for Plaintiffs, there are no answers to be had from discovery because there are no questions to ask. The similarities between this case and Cunningham cannot be overstated… Just like the plaintiffs in Cunningham, Plaintiffs had all the facts at the time of closing to allege their claim under RESPA, but their inaction during the limitations period bars the application of equitable tolling under a theory of fraudulent concealment.” The court therefore found the above claims to be time-barred, and also precluded the remaining claims under the filed-rate doctrine, which provides that a rate, such as that for PMI, filed with and approved by a governing regulatory agency is unassailable in judicial proceedings brought by ratepayers. The District Court granted defendants’ motion for judgment on the pleadings. Menichino v. Citibank, N.A., Case No. 2:12-cv-00058 (USDC W.D. Pa. Jan. 19, 2018).

This post written by Gail Jankowski.
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In Excess Insurance Co. Ltd. v Factory Mutual Insurance Co., 3 NY3d 577 (N.Y. 2004), New York’s high court held that, under a facultative reinsurance agreement, the reinsurer’s liability was limited to a per occurrence cap, despite the fact that that the underlying policy covered expenses, such as underlying defense costs, in addition to indemnity for losses.

On a certified question from the Second Circuit Court of Appeals, that same court addressed the scope of its holding in Excess, finding that its prior decision does not impose a per se cap, but that rather the question of the limits of liability under a facultative reinsurance agreement is governed by the specific terms and provisions of the facultative agreement at issue. The Court noted that its decision in Excess was limited to the facts before it, and did not announce a presumption or rule of construction favoring a cap in all factual circumstances: “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.”

It distinguished Excess on its facts, noting that in Excess, the loss adjustment expenses were incurred in litigation between the insurer and its policyholder, and they were not costs that the insurer was obligated to pay under the terms of the underlying policy itself. It thus held that, “[w]hether a similar (or even identical) limitation clause would apply to third-party defense costs, in a certificate reinsuring a liability insurance policy, was never at issue” in Excess.

Limiting its ruling to the certified question before it, the Court did not analyze the issue further to determine the ultimate outcome. Rather, the case now reverts back to the Second Circuit, given this guidance.

Global Reinsurance Corporation of America v. Century Indemnity Co., No. 124 (N.Y. Dec. 14, 2017).

This post written by John Pitblado.
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The New York Court of Appeals recently answered in the negative a question certified to it by the U.S. Court of Appeals for the Second Circuit regarding prior precedent and whether per occurrence liability limits in facultative reinsurance contracts cap all obligations of the reinsurer, including for expenses such as defense costs. In doing so, the state’s highest court reiterated that general principles of contract construction apply to reinsurance contracts.

Specifically, the Second Circuit asked whether the New York Court of Appeals’ 2004 decision in Excess Ins. Co. v. Factory Mut. Ins. Co.:

“impose[d] 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?”

In the underlying Second Circuit case, the cedent (“Century”) billed its reinsurer (“Global”) over $82,000 in loss and over $244,000 in expenses for a particular claim, even though the certificate’s stated limit was $250,000. Citing Excess, Global argued the $250,000 limit operated as a cap on its ultimate reinsurance obligations, while Century argued the cap applied only to loss (indemnity) and that Global was still responsible to cover expenses in addition to the limit.

The court began its analysis with a detailed explanation of its decision in Excess. There, the court interpreted the limitations clause in a facultative reinsurance certificate to operate an expense-inclusive cap. In the decade-plus since the Excess decision, however, some courts have interpreted the ruling to mean that third-party defense costs incurred by a cedent are unambiguously or presumptively subject to the amount of the stated liability limits in such certificates.

Answering the certified question in the negative, the court rejected that Excess established such a per se rule on expense-inclusive caps. It distinguished the issues presented in Excess and in the underlying Second Circuit case, with the former addressing whether the reinsurance contract at issue’s limitations clause established a cap for both liability costs and expenses or merely liability costs. Specifically, the court noted, the Excess case read the limitations clause in context of the entirety of the reinsurance contract in line with general principles of contract construction. Additionally, the court distinguished Excess on the fact that the expenses incurred were in litigation between the insurer and its policyholder, not costs (such as third-party defense costs) the insurer was obligated to pay pursuant to the terms of the underlying contract itself. Thus, the court concluded that Excess did not address whether similar limitations clauses would require reinsurers cover third-party defense costs in excess of those limits.

The court “h[e]ld definitively” that Excess did not supersede the ordinary rules of contract interpretation that otherwise apply to reinsurance contracts. Thus, under the Court of Appeals holding, New York law does not impose a rule nor a presumption that a liability limitation clause automatically caps all obligations, including defense costs and other expenses, owed by a reinsurer without regard for the specific provisions in the reinsurance contract, and the court answered the Second Circuit’s question in the negative. Global Reinsurance Corp. of Am. v. Century Indem. Co., No. 124 (N.Y. Dec. 14, 2017).

This post written by Thaddeus Ewald .

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