Second Circuit Holds “Loss Expenses” Not Categorically Excluded from Liability Limit of Facultative Reinsurance Certificate

In Utica Mutual Insurance Co. v. Munich Reinsurance America, Inc., the Second Circuit Court of Appeals reversed and remanded a summary judgment determination against a reinsurer with regard to the reinsurer’s obligations to reimburse the insured’s claim expenses. Utica Mutual Insurance Company had issued an umbrella policy to Goulds Pumps, Inc. Utica incurred millions of dollars of losses under this policy due to asbestos-related litigation brought against Goulds. Munich Reinsurance reinsured Utica’s umbrella policy under a facultative reinsurance certificate that contained a $5 million limit of liability. After Munich paid out $5 million under the certificate, Utica also sought to recover unpaid expenses that Utica claimed were not subject to the certificate’s liability limit.  Munich refused to reimburse Utica for these expense payments, contending that the limit of liability was exhausted.

Utica filed a declaratory action to recover the expenses. Munich moved for summary judgment on the grounds that the certificate’s liability limit unambiguously applied to expenses. The district court agreed. Utica appealed.

The Second Circuit reversed the district court, holding that the certificate’s language was ambiguous with regard to whether the limit applied to expenses. The Second Circuit noted that while Munich’s obligation to indemnify Utica was expressly “subject to” the $5 million policy limit in the certificate’s declarations, the provision governing the allocation of loss expenses was not clearly constrained by this limit.  In light of the ambiguity, the Second Circuit determined that more discovery was needed to uncover the intention of the parties. In so holding, the Second Circuit also rejected the contention that the liability limit of a reinsurance policy was presumptively expense-inclusive.