                                     2014 IL App (1st) 133090

                                                                                SECOND DIVISION
                                                                                 December 16, 2014

No. 1-13-3090


CONTINENTAL CASUALTY COMPANY,      )                           Appeal from the
                                   )                           Circuit Court of Cook County
     Plaintiff-Appellant,          )
                                   )
v.                                 )                           No. 12 CH 42911
                                   )
MIDSTATES REINSURANCE CORPORATION, )
                                   )                           Honorable Mary L. Mikva,
     Defendant-Appellee.           )                           Judge Presiding.


       PRESIDING JUSTICE SIMON delivered the judgment of the court, with opinion.
       Justices Neville and Liu concurred in the judgment and opinion.

                                             OPINION

¶1     Plaintiff Continental Casualty Company filed a complaint for declaratory judgment and

other relief on November 30, 2012, seeking a declaration of the rights and obligations arising

under multiple facultative reinsurance contracts issued to plaintiff by defendant MidStates

Reinsurance Corporation. Defendant reinsured plaintiff for shares of policies between 1981 and

1984, under which plaintiff sought coverage in 2003-05 as a result of numerous claims resulting

from environmental liabilities covered under the policies. Defendant made payments on the

claims for what it claims were the total amount of reinsurance limits provided by each certificate.

Plaintiff sought declaratory relief, alleging that plaintiff had breached its contracts by failing to

pay the amounts due, and damages.

¶2     Defendant sought judgment on the pleadings, asserting that the certificates were not

ambiguous and clearly provided limits on the amount reinsured. The trial court granted
No. 1-13-3090

defendant's motion for judgment on the pleadings, finding the reinsurance certificates were not

ambiguous and limited both losses and expenses assumed by defendant. Plaintiff appeals,

arguing that the certificates are not facially clear, complete, and unambiguous contracts and do

not provide a limit of coverage as found by the circuit court. For the following reasons, we

affirm the judgment of the circuit court.

¶3                                      I. BACKGROUND

¶4     This case involves the interpretation of five reinsurance policies issued to plaintiff by

defendant. One reinsurance policy related to an excess third-party liability policy plaintiff issued

to RSR Corporation in 1981. The remaining four reinsurance policies covered a 1979

commercial casualty policy that plaintiff issued to Borg-Warner Corporation. All of the

certificates issued by defendant, through the agent for its predecessor, are two-page documents

with specific policy information on the first page and an identical list of 12 policy "Provisions"

on the second page.

¶5     Paragraph 7 of the certificates contains the key language in this case, with that paragraph

being amended by the parties by endorsement to two of the certificates. Paragraph 7 of each

certificate, as amended, provides in full:

       Item A                Item B                  Item C                      Item D
   Description of        Original Policy      Reinsured's Retention            Reinsurance
      Coverage               Limits                                            Assumption
     [Account /
  Certificate No.]
Excess general        $500,000 each occ /    $100,000 each occ /        45% p/o $400,000 each
liability [RSR /      $500,000 agg csl       $500,000 agg csl           occ / nil agg excess
DAR 13894]                                                              $100,000 each occ /
                                                                        $500,000 agg csl
Excess general        $1,000,000           NIL this layer               25% p/o $500,000 ea
liability [Borg-      occ/4,500,000 agg bi                              occ/NIL agg bi & pd
Warner / DAR          $1,000,000 occ /                                  separately excess
14263]                $4,500,000 agg pd                                 $500,000 ea
                                                                        occ/$4,500,000 agg bi &

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No. 1-13-3090

                                                                        pd separately
Excess general       $1,000,000           20% p/o the difference        20% p/o difference
liability [Borg-     occ/4,500,000 agg bi between $500,000              between $500,000
Warner / DAR         $1,000,000 occ /     occ/NIL agg bi & pd           occ/NIL agg bi & pd
14265]               $4,500,000 agg pd    separately and $350,000       separately and $350,000
                                          occ inclusive                 occ inclusive of
                                          expense/$4,500,000 agg        expense/$4,500,000 agg
                                          bi & pd separately            bi & pd separately
Excess general       $1,000,000           10% p/o the difference        22.5% p/o difference
liability [Borg-     occ/4,500,000 agg bi between $500,000              between $500,000
Warner / DAR         $1,000,000 occ /     occ/NIL agg bi & pd           occ/NIL agg bi & pd
16674]               $4,500,000 agg pd    separately and $350,000       separately and $350,000
                                          occ inclusive                 occ inclusive
                                          expense/$4,500,000 agg        expense/$4,500,000 agg
                                          bi and pd separately          bi and pd separately
Excess general       $1,000,000           NIL this layer                25% p/o $500,000 ea
liability [Borg-     occ/4,500,000 agg bi                               occ/NIL agg excess
Warner / DAR         $1,000,000 occ /                                   $500,000 ea
16676]               $4,500,000 agg pd                                  occ/$4,500,000 agg bi &
                                                                        pd separately


¶6     The Provisions of the reinsurance certificates were provided on the second page

of each certificate, the relevant Provisions providing:

                "A. The Company warrants to retain for its own account or that of its

       treaty reinsurer(s) the amount of liability specified in Item 7C unless otherwise

       provided herein, and the liability of the Reinsurer in Item 7D shall follow that of

       the Company, except as otherwise specifically provided herein, and shall be

       subject in all respects to all the terms and conditions of the Company's policy.

       The Company shall furnish the Reinsurer with a copy of its policy and all

       endorsements thereto which in any manner affect this certificate, and shall make

       available for inspection and place at the disposal of the Reinsurer's authorized

       representatives at reasonable times any of its records relating to this reinsurance

       or claims in connection therewith.


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No. 1-13-3090

                B. Prompt notice shall be given to the Reinsurer by the Company of any

       claim, occurrence or accident which appears likely to involve this reinsurance and

       while the Reinsurer does not undertake to investigate or defend claims or suits it

       shall nevertheless have the right and be given the opportunity to associate with the

       Company and its representatives at the Reinsurer's expense in the defense and

       control of any claim, suit or proceeding involving this reinsurance, with the full

       cooperation of the Company.

                ***

                D. All claims involving this reinsurance, when settled by the Company,

       shall be binding on the Reinsurer, which shall be bound to pay its proportion of

       such settlements, and in addition thereto, in the ratio that the Reinsurer's loss

       payment bears to the Company's gross loss payment with respect to business

       accepted on an excess of loss basis and in the ratio that the Reinsurer's limit of

       liability bears to the Company's gross limit of liability with respect to business

       accepted on a pro rata basis, its proportion of expenses, other than Company

       salaries and office expenses, incurred by the Company in the investigation and

       settlement of claims or suits and, with the prior consent of the Reinsurer to trial

       court proceedings, its proportion of court costs and interest on any judgment or

       award."

¶7     In the 1990s and early 2000s, RSR and Borg-Warner became the subject of numerous

claims for injuries from environmental concerns related to hazardous waste or asbestos issues at

the insured's properties. Plaintiff defended RSR, litigated coverage of RSR, and paid to settle

claims against RSR. Plaintiff submitted billings and proofs of loss to defendant related to two


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No. 1-13-3090

separate occurrences. Defendant made payments of $180,000 for each occurrence in 2004,

remitting payment along with a letter and legal memorandum explaining its view of its liability

under the reinsurance certificate.

¶8      Following years of litigation concerning plaintiff's coverage of Borg-Warner, a settlement

agreement was entered between the parties. Plaintiff submitted billings to defendant under the

terms of the reinsurance polices related to these claims. In 2004, defendant made payments to

plaintiff up to the amount that defendant claimed was the limit on each reinsurance certificate.

¶9      Plaintiff did not receive payment of all amounts billed and disputed defendant's claims

concerning the limits under the reinsurance certificates. Plaintiff filed the underlying complaint

asserting breach of contract claims against defendant. Plaintiff sought declaratory relief that the

reinsurance certificates did not include limits on expenses, that defendant breached the

agreements, and damages. Defendant filed a motion for judgment on the pleadings, asserting that

the reinsurance certificates were unambiguous and defendant properly paid the limit on each of

plaintiff's claims.

¶ 10    In a written opinion, the circuit court granted defendant's motion for judgment on the

pleadings. The court found that Provisions A and D of the reinsurance certificates did not remove

expenses from the amount of reinsurance assumed, but also did not specifically indicate that

expenses were not subject to those limits. Citing to defendant's principle authority, Bellefonte

Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990), and the line of

cases that followed the "Bellefonte principle" that facultative reinsurance certificate limits cap

reinsurance for both indemnity and expenses, the court found that the reinsurance certificates

were not ambiguous and limited both losses and expenses assumed by defendant to the limits

stated in the certificates. This appeal followed.


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No. 1-13-3090

¶ 11                                       II. ANALYSIS

¶ 12    Plaintiff argues on appeal that the trial court erred in granting defendant judgment on

pleadings pursuant to section 2-615(e) of the Code of Civil Procedure. 735 ILCS 5/2-615(e)

(West 2010). Judgment on the pleadings is similar to summary judgment in that judgment is

proper where there is no genuine issue of material fact and the moving party is entitled to

judgment; however, it is limited to the pleadings. Allstate Property & Casualty Insurance Co. v.

Trujillo, 2014 IL App (1st) 123419, ¶ 15. The moving party concedes the truth of all well-

pleaded facts in the complaint and the court must construe the evidence, and reasonable

inferences, in favor of the nonmoving party. Id. A reviewing court reviews the grant or denial of

judgment on the pleadings de novo. Id.

¶ 13    The trial court considered the five reinsurance certificates issued to plaintiff by

defendant. In interpreting contracts such as the reinsurance certificates, we follow the "four

corners" approach, presuming the document speaks for itself and the intentions of the parties

must be determined from the language they have used in drafting the agreement. Air Safety, Inc.

v. Teachers Realty Corp., 185 Ill. 2d 457 (1999). An ambiguity does not exist in a contract

simply because the parties disagree on the meaning of a provision, but when the contract

contains language susceptible to more than one reasonable interpretation. Ringgold Capital IV,

LLC v. Finley, 2013 IL App (1st) 121702. Only then may extrinsic evidence be considered to

establish the intent of the parties. Id.

¶ 14    In the instant matter, the circuit court found the language in the reinsurance certificates

was clear and unambiguous and that the "reinsurance assumed" provision of Item D created an

overall limitation on the obligation to reinsure both losses and expenses. The court then found

the Bellefonte case and following cases interpreting this same, or similar, language persuasive.


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We agree with the circuit court and hold that the certificates provided a clear policy limit,

inclusive of expenses, and judgment on the pleadings was properly granted.

¶ 15    In Bellefonte, the Second Circuit considered six reinsurance agreements between the

plaintiff and six reinsurers that contained substantially similar terms. Bellefonte, 903 F.2d at 911.

The agreements articulated that reinsurance was provided "subject to the terms, conditions and

amount of liability set forth herein" and a "Reinsurance Accepted" provision that called for a per-

occurrence amount of coverage. (Internal quotation marks omitted.) Id. The agreements also

contained third and fourth provisions containing "follow the form" and "follow the fortunes"

clauses. Id.

¶ 16    The court found that the first two provisions provided an express cap for the certificates

and the plaintiff could not recoup defense costs beyond that cap as "the limitation is to be a cap

on all payments by the reinsurer." (Internal quotation marks omitted.) Id. at 913. The court

reasoned that any other conclusion would effectively eliminate the stated limitation on the

reinsurer's liability and the "follow the fortunes" clause requires the reinsurer to bear the risks of

the insurer, but only to that stated limit. Id. Furthermore, the court found that the phrase "in

addition thereto" in the "follow the fortunes" clause was included "merely to differentiate the

obligations for losses and expenses. The phrase in no way exempts defense costs from the overall

monetary limitation in the certificate. *** In our view, the 'in addition thereto' provision merely

outlines the different components of potential liability under the certificate. It does not indicate

that either component is not within the overall limitation." Id.

¶ 17    This analysis and conclusion by the Bellefonte court that reinsurer "liability for defense

costs will not extend beyond the limit of liability as stated in the reinsurance agreement" has

been widely accepted and cited by the courts and experts. 1A Steven Plitt, et al., Couch on


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Insurance 3d § 9:29 (rev. 2014); Unigard Security Insurance Co. v. North River Insurance Co., 4

F.3d 1049 (2d Cir. 1993); Pacific Employers Insurance Co. v. Global Reinsurance Corp. of

America, No. 09-6055, 2010 WL 1659760 (E.D. Penn. Apr. 23, 2010). The contract terms

involved in Bellefonte are similar to the provisions involved in the instant reinsurance

certificates. Provision A, the "follow the form" provision, provides that, "except as specifically

provided herein" the reinsurance certificate was to mirror the underlying insurance policies.

Provision D, the "follow the fortunes" provision, provides that the reinsurer must pay its

proportion of settlements, the ratio of losses to the insured's gross loss payment, and the ratio that

the reinsurer's limit of liability bears as to its proportion of expenses and costs. More

importantly, under Item D, reinsurance assumed, a ratio of total liability assumed is provided to

calculate a monetary limitation.

¶ 18   As found by the circuit court, nothing in these provisions can be said to remove expenses

from the overall liability cap provided in Item D, reinsurance assumed. Plaintiff asserts that the

terms of reinsurance are ambiguous because in Items C and D, two of the five certificates include

the language "inclusive of expenses," while the other certificates are silent on this issue. While

those two certificates contain that language, there is no other differentiation of these costs to

separate expenses from the cap provided by Item D. While plaintiff takes issue with defendant's

labeling this "belt and suspenders" drafting, a plain reading of the terms in the certificates

indicates this characterization is proper. By the language, and very nature of the excess of

liability insurance, this inclusion clearly appears to be an abundance of caution rather than an

intention to exclude expenses from the liability cap.

¶ 19   Plaintiff’s reliance on Penn Re, Inc. v. Aetna Casualty & Surety Co., No. 85-385-CIV-5,

1987 WL 909519 (E.D. N.C. June 30, 1987), is misplaced. Penn Re was decided before


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No. 1-13-3090

Bellefonte and does not enjoy the same support in case law. The Penn Re court examined the

provisions in the reinsurance certificates before it that was similar to the instant certificates and

highlighted the “in addition thereto” language relating to costs to find that the reinsurer was

liable for costs above the policy limit for losses. Id. at *8-10. As addressed above, we disagree

with this reading and follow the reasoning in Bellefonte and following cases.

¶ 20   Likewise, plaintiff’s reliance on International Surplus Lines Insurance Co. v. Fireman’s

Fund Insurance Co., No. 88 C 320 1990 WL 141464 (N.D. Ill. Sept. 20, 1990) (ISLIC), is

misplaced as that case is distinguishable. The ISLIC court did find a reinsurance contract with

language similar to the instant matter to be ambiguous, with one key difference; there was no

stated aggregate limit in that case. Id. at *4. Therefore, the court found the precise amount of

coverage inherently ambiguous, whereas in the instant matter the parties included language

establishing aggregate limits.

¶ 21   Furthermore, we will not consider extrinsic evidence to determine if a latent ambiguity

exists under the provisional admission approach discussed in Air Safety v. Teachers Realty

Corp., 185 Ill. 2d 457 (1999), as that court did not rule on the issue and the four corners rule of

contract interpretation remains the law in Illinois. River’s Edge Homeowners’ Ass’n v. City of

Naperville, 353 Ill. App. 3d 874, 880 (2004). We have found the certificates clearly and

unambiguously provide for an aggregate policy limit that includes both losses and expenses. For

the foregoing reasons, we affirm the judgment of the circuit court granting plaintiff judgment on

the pleadings.

¶ 22                                    III. CONCLUSION

¶ 23   For the reasons stated, we affirm the judgment of the circuit court.

¶ 24   Affirmed.


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