insuranceIn late December 2021, the U.S. Court of Appeals for the Second Circuit issued a blockbuster decision grappling with the Erie doctrine, stare decisis, and overturning a decades-old precedent. It was the fourth appellate decision in a lengthy litigation reminiscent of Dickens' Bleak House. This was not litigation about constitutional rights or environmental justice, but a case about an unlikely subject: facultative reinsurance.

In Global Reinsurance v. Century Indemnity, the Second Circuit overturned a 1990 precedent that was notorious in the reinsurance industry, Bellefonte Reinsurance v. Aetna Cas. & Sur. This article tells the story of Global Re and the lessons it teaches regarding the interpretation of reinsurance contracts.

The 'Bellefonte' Presumption. Many liability insurance policies do not cap the insurer's liability for the cost of defending the policyholder in litigation. As the Appleman treatise notes, defense costs are often "in addition to the policy limits of liability." The same concept applies to the facultative contracts reinsuring defense-in-addition policies. As a commentator wrote in a prominent reinsurance journal, ARIAS US Quarterly (Eugene Wollan, First Quarter, 1999): "The understanding in the reinsurance world since time immemorial has been that the reinsurer's share of expense is not charged against its limit of liability—in other words, the expense is in addition to the limit."