Use of “Four Corners” Approach to Review Multiple Facultative Reinsurance Contracts for Ambiguities

In Continental Casualty Co. v. MidStates Reinsurance Corp., Continental Casualty Company (“CCC”) 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 that MidStates Reinsurance Corporation (“MRC”) issued to CCC. The contracts reinsured CCC for shares of policies between 1981 and 1984, under which CCC sought coverage in 2003-05 as a result of numerous claims from environmental liabilities covered under the policies. MRC made payments on the claims for what it claims were the total amount of reinsurance limits provided by each certificate. CCC sought declaratory relief, alleging that MRC had breached its contracts by failing to pay the amounts due and damages. MRC sought judgment on the pleadings, asserting that the certificates were not ambiguous and clearly provided limits on the amount reinsured. The trial court granted MRC’s motion for judgment on the pleadings, finding the reinsurance certificates were not ambiguous and limited both losses and expenses assumed by MRC.

On appeal, CCC contended that the certificates were not facially clear, complete, and unambiguous contracts and did not provide a limit of coverage. CCC further contended that because these contracts were ambiguous, MRC cannot assume limits to both losses and expenses within the reinsurance certificates.

The court reviewed the certificates for ambiguities using the “four corners” approach, which presumes the document speaks for itself and the intentions of the parties are derived from the language they chose to include in the document. The court held that the certificates provided a clear policy limit, inclusive of expenses, and the trial court properly granted MRC’s judgment on the pleadings.

Illinois Insurance Law: 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. Only then may extrinsic evidence be considered to establish the intent of the parties. Where no extrinsic evidence is allowed, the contract will be interpreted using the “four corners” approach and the intentions of the parties will be derived from the language they chose to use within their agreement.

Continental Casualty Co. v. MidStates Reinsurance Corp., 2014 IL App (1st) 133090.