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.