Academic journal article Albany Law Review

Global Re Brings the Law in Line with Reinsurance Industry Practice

Academic journal article Albany Law Review

Global Re Brings the Law in Line with Reinsurance Industry Practice

Article excerpt

It has taken thirty years, but the Second Circuit Court of Appeals and the New York Court of Appeals have each finally disavowed their respective decisions in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co. (1) ("Bellefonte"), Unigard Security Insurance Co. v. North River Insurance Co. (2) ("Unigard"), and Excess Insurance Co. v. Factory Mutual Insurance Co. (3) ("Excess") that had threatened "disastrous economic consequences" (4) for insurers who paid tens of millions of dollars in defense costs incurred by their policyholders in environmental, asbestos, and other product liability mass tort litigation, only to find their facultative reinsurance had "a gaping hole" created by a court-made unexpected cap on the coverage they thought they had purchased. (5)

This article will first present a brief overview of reinsurance, then discuss the earlier decisions that were "roundly criticized in the insurance industry" (6) and ignored by many arbitrators (7) confronted with "insurance-in-addition-to-limits" facultative reinsurance claims, and finally the New York Court of Appeals and Second Circuit's decisions in Global Reinsurance Corp. of America v. Century Indemnity Co. ("Global Re") (8) that brought the current state of the law in line with what has been the generally accepted reinsurance industry practice.


Reinsurance is a contractual arrangement that enables the reinsured (also called the "cedent") to transfer some or all of the risk of loss on policies it has underwritten to one or more reinsurers. (9) Simply put, reinsurance is "insurance for insurance companies." (10) Reinsurance permits the cedent insurer to '"minimize its exposure to catastrophic loss,' 'reduce the amount of the legally required reserves held for the protection of policyholders,' and [to] 'increase [its] ability to underwrite other policies or make other investments.'" (11)

There are two basic forms of reinsurance contracts: treaty reinsurance and facultative reinsurance treaties. (12) Treaty reinsurance "involves an ongoing agreement between two insurance companies binding one in advance to cede and the other to accept certain reinsurance business pursuant to its provisions." (13) Facultative reinsurance--so called because the cedent retains the "faculty," or option, to accept or decline the proffered risk, and the type involved in Bellefonte, Unigard, Excess and Global Re--"involves the offer of a portion of a particular risk to one or more potential reinsurers, who are then free to accept or reject the risk in whole or part." (14) The reinsurer agrees to indemnify the ceding insurer in exchange for an agreed portion of the premium for the risk transferred. (15)

Facultative certificates "are usually 'standard forms', 'short and concise, using terms of art rather than lengthy, legalistic explications to define the obligations of the parties.'" (16) They commonly contain provisions defining the reinsurer's obligations to the ceding insurer, including a "follow-the-form" or "following form" clause that is intended to bring about concurrence between the reinsured policy and the certificate. (17) "[C]oncurrency between the insurance and reinsurance policies is a what makes reinsurance work; if the insurance policy is triggered, it should follow that the reinsurance policy is similarly triggered." (18)

They also contain "follow the settlements" clauses binding reinsurers to "the settlement or compromise agreed to by the cedent unless they can show impropriety in arriving at the settlement," (19) or that the settlement was not "settled reasonably and in good faith." (20) And they will include provisions setting forth the type and amount of insurance provided by the underlying policy reinsured and the amount of "Reinsurance Accepted" by the reinsurer. (21)


"Aetna issued primary and excess insurance policies [insuring A.H.] Robins against liability for personal injuries arising from use of Robins' products," including the Dalkon Shield, an intrauterine device. …

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