Federal Court in PA Rules That Stated Limits in
Facultative Certificate Includes LAE

Written By Attorneys: Michael J. Kurtis and Kenneth T. Levine

This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

The U.S. District Court for the Eastern District of Pennsylvania has ruled that the $1,000,000.00 reinsurance limits set forth in a facultative certificate were intended to encompass the reinsurer's liability for both indemnity and loss adjustment expenses (LAE). Cedants in particular should be wary, as specifically noted by the court in its decision, to ensure that their reinsurance agreements accurately reflect their intentions with respect to reinsurers' liability for LAE payments.

Pacific Employers Insurance Company v. Global Reinsurance Corporation of America, Civil Action No. 09-6055 (E.D. PA. April 23, 2010) (slip copy, presently cited as 2010 WL 1659760) involved a facultative reinsurance certificate between Pacific Employers Insurance Company ("Pacific") and Global Reinsurance Corporation of America ("Global"). Under the facultative agreement, Pacific retained the first $1,000,000.00 of loss. The agreement then provided limits of $1,000,000.00 for "any one occurrence and in the aggregate where applicable part of $4,000,000.00 which is excess of $1,000,000.00 which in turn is excess of underlying insurance."

The agreement further provided that the liability of Global followed that of Pacific, subject to the terms and conditions of Pacific's policy except when otherwise specifically provided. In addition, the agreement provided that Global was to pay "its proportion of expenses...incurred by [Pacific]" in the investigation of claims and any court costs and interests on any judgment or award in the ratio that any loss payment by Global bears to the gross loss payment by Pacific.

When a dispute arose as to Global's obligation to reimburse Pacific under the facultative certificate, Pacific filed suit. Global filed a counterclaim seeking a declaration that the $1,000,000.00 limit of liability set forth in the facultative certificate was the maximum that Pacific could potentially recover from Global in connection with the underlying claim. Global then filed a motion for judgment on the pleadings regarding its request for declaratory relief. The issue raised by the motion was whether expenses ("LAE") are subject to the $1,000,000.00 limit stated in the "reinsurance accepted" section of the facultative certificate.

The parties did not dispute that the language in item 4 of the facultative certificate set a $1,000,000.00 cap. However, Pacific disputed Global's assertion that the $1,000,000.00 cap applied to LAE. The District Court found that the language of the facultative certificate clearly encompassed expenses because it defined Global Re's maximum exposure under the facultative certificate and did not differentiate between reinsurance accepted for "losses" versus reinsurance accepted for "expenses." The court found that the language of the facultative certificate simply provided a $1,000,000.00 total cap on liability for loss payments, expense payments, or any combination thereof.

The court opined that if the parties had intended to exclude expenses from the total liability limit, they could have made that clear in the certificate, which they did not.

Pacific argued that the facultative certificate created two separate obligations and excluded the payment of expenses from the liability limit. The court disagreed, explaining that the language in the certificate that differentiated between the payment of a proportion of loss and a proportion of expenses did not outline limits of liability, but merely outlined two separate proportions of losses and expenses that Global was obligated to pay. The court found that language did not mention a separate limit for expenses and said nothing about excluding expenses from the $1,000,000.00 cap.

In conclusion, the court noted that if the parties had intended to exclude expenses from the total liability limit, they could have made that clear in some section of the facultative certificate. Moreover, the court found that the facultative certificate explicitly made Global's obligations "subject to the terms, conditions and limits of liability set forth herein," which made it clear that Global's obligations to Pacific were "subject to" the $1,000,000.00 limit. Based upon this reasoning, the court granted Global's motion for judgment on the pleadings and entered an order declaring that Global's maximum obligation to Pacific under the reinsurance agreement was $1,000,000.00.