The Pennsylvania Supreme Court will not disturb a first-impression ruling by the state Superior Court that, unless explicitly stated otherwise, a reinsurer's policy limit does not cap defense costs.

The justices denied allocatur Aug. 7 in Century Indemnity v. OneBeacon Insurance.

Last October, a three-judge panel of the Superior Court upheld a Philadelphia trial judge's ruling that OneBeacon Insurance, the reinsurer, was on the hook for defense expenses incurred by its reinsured above and beyond the limit established in the “Reinsurance Accepted” section of its facultative certificates.

Judge Paula Francisco Ott, writing for the court, agreed with the lower court that the certificates were ambiguous as to whether that section was intended to cap OneBeacon's liability for both losses and defense expenses.

The case stems from asbestos-related claims against Century Indemnity and Pacific Employers Insurance Co. (PEIC), for which OneBeacon, as those companies' reinsurer, paid $11 million pursuant to the reinsurance policy limit stated in the certificates.

OneBeacon argued that it should not be liable for defense expenses beyond that amount, but the trial court disagreed and, after a nonjury trial, awarded Century about $4.8 million plus prejudgment interest, and PEIC $2.4 million plus prejudgment interest.

Philadelphia Court of Common Pleas Administrative Judge Gary S. Glazer said OneBeacon's policy did not make clear that the “Reinsurance Accepted” amount in the certificates included defense costs.

OneBeacon argued on appeal that the terms and conditions of the certificate follow that of the underlying policy “except as otherwise specifically provided herein” and that because the language does not explicitly state otherwise, the “Reinsurance Accepted” cap must include both losses and defense expenses. The company also argued that because the “Reinsurance Accepted” is set at a specific amount, the reinsurance certificate follows the terms and conditions of the underlying policy only up to that amount.

But Francisco, joined by Judge Lillian Harris Ransom and Senior Judge James J. Fitzgerald III, agreed with Glazer, saying that, “viewing the certificate as a whole, we do not find the language unambiguously limits OneBeacon's entire liability for losses and expenses to the 'Reinsurance Accepted' amount.”

“A reasonable interpretation of the certificate's reference to OneBeacon's 'liability … specified in Section IV' is that it refers only to liability for losses,” Francisco said. “This is particularly true in light of General Condition (3), which requires the reinsurer to pay its proportion of losses, 'and in addition thereto' its proportion of expenses. Similarly, the 'except as otherwise provided herein' language is also ambiguous because the certificate does not explicitly state that expenses are included in (or 'subject to') the 'Reinsurance Accepted' limit. Pursuant to this reasoning, if the certificate follows the underlying policy, expenses must be reimbursed in addition to the policy limits.”

The Superior Court rejected OneBeacon's attempt to analogize its case with Bellefonte Reinsurance v. Aetna Casualty & Surety, a 1990 case in which the U.S. Court of Appeals for the Second Circuit rejected Aetna's argument that the “follow the fortunes” doctrine required reinsurers to pay for all of a reinsured's expenses and costs even if they exceed the “Reinsurance Accepted” amount listed on the certificate.

The Bellefonte court focused on the language in the certificates that stated Bellefonte's obligation to reinsure Aetna “subject to the terms, conditions and amount of liability set forth herein.”

But Ott said OneBeacon's reinsurance certificates stated only that the reinsurance was “subject to the general conditions set forth on the reverse side.”

“It does not expressly provide that all of the coverage is subject to the 'Reinsurance Accepted' limit,” Ott said.

Ott also noted that Century/PEIC's underlying policies provide for the payment of expenses beyond the limits.

“Therefore, because the reinsurance certificate 'follows' that of the underlying policy, it would cover expenses above the liability limit,” Ott said. “This is factually different from the situation in Bellefonte, where the defense costs were paid as part of the reinsured's settlement agreement with the underlying insured—an agreement to which the reinsurer was not a party.”

Counsel for Century, Jonathan Hacker of O'Melveny & Myers in Washington, D.C., could not be reached for comment on the Supreme Court's allocatur denial; nor could OneBeacon's attorney, Joseph Donley at Clark Hill in Philadelphia.