Pacific Employers Ins. Co. v. Global Reinsurance Corp. of Am., 693 F.3d 417 (3d Cir. 2012).
Reversing a lower court decision, the United States Court of Appeals for the Third Circuit ruled that a reinsurer had no obligation to indemnify its reinsured for certain asbestos- related losses due to late-notice of loss given by the reinsured. Applying New York law, the Third Court concluded that the reinsurer did not need to demonstrate it was prejudiced as a result of the late notice.
The dispute arose under a certificate of reinsurance obtained by the reinsured from the reinsurer’s predecessor covering an excess policy. Paragraph D of the reinsurance certificate stated that “[a]s a condition precedent, [the reinsured] shall promptly provide the Reinsurer with a definitive statement of loss on any loss or occurrence.” The reinsured had received initial notice of the claim in April 2001 and the underlying loss reached the excess layer by 2004. The reinsured advised its broker to keep its reinsurers informed about the claim in 2006, 2007 and 2008, but the broker failed to do so. The reinsurer was first provided notice of the claim in April 2008, with a demand for payment following in September 2009. Having discovered that the reinsured had first received notice in 2001, the reinsurer denied coverage and asserted a late notice defense.
The district court had acknowledged that the reinsurance certificate unambiguously required the reinsured to provide a definitive statement of loss promptly after the initial claim from the underlying insured. It also found that the submission of a definitive statement of loss was a condition precedent to recovery. But, the district court determined that—in the absence of an explicit choice of law provision—it was required to determine which law applied to the dispute. This issue was critical because of the conflict raised by the competing laws. Under New York law, which the reinsurer argued should apply, the reinsurer was not required to show prejudice to succeed on its late notice defense. Under Pennsylvania law, which the reinsured argued in favor of, prejudice was arguably a requirement for succeeding on a late notice defense. Although there was no definitive statement from the Supreme Court of Pennsylvania, the district court agreed with the reinsured and predicted that prejudice would in fact be a requirement under Pennsylvania late notice law. It concluded that the reinsurer had failed to allege facts supporting a finding of prejudice.
On appeal, the Third Circuit reversed. It agreed with the district court that New York law on the subject was not in dispute and that a showing of prejudice was not required for a late notice defense. While acknowledging that there was no clear guidance in Pennsylvania, the Third Circuit agreed that Pennsylvania law would likely require a showing of prejudice because of Pennsylvania’s interest in preventing technical forfeitures of coverage. Faced with a true conflict, the Third Circuit conducted a choice of law analysis and determined that, contrary to the district court’s conclusion, New York law applied. At the time the agreement was signed in 1980, the reinsurer was located in New York and the reinsured was located in California. The only connection to Pennsylvania was that the reinsured had become a Pennsylvania company in 1999. Although not easily ascertainable because the minimal negotiations of the certificate occurred via telex, the court ultimately decided that the place of contract formation was determined to be New York. Based on the totality of the circumstances at the time of contracting, where a New York reinsurer accepted, in New York, the terms and conditions of an agreement with a California company, there was no reason to believe the parties had any expectation that Pennsylvania law would apply. The court thus ruled that New York law applied and that the reinsurer was not required to show prejudice in order to deny coverage. The Third Circuit therefore reversed the lower court’s ruling and ordered that judgment of non-liability be entered in the reinsurer’s favor.
As an aside, New York law on late notice requires a showing of prejudice generally, but not when the reinsurance contract has an explicit condition precedent notice requirement as was the case here.