AIU Ins. Co. v. TIG Ins. Co., No 07 Civ. 7052 (SHS), 2013 U.S. Dist. LEXIS 41716 (S.D.N.Y Mar. 25, 2013).
In a rare late notice case, a New York federal court examined whether the cedent's notice under nine facultative certificates was late (more than three years) entitling the reinsurer to avoid coverage. None of the fac certs had a choice-of-law clause. The Magistrate Judge concluded Illinois law should apply and recommended granting the reinsurer’s summary judgment motion. The court agreed.
This case arose out of asbestos losses incurred by Foster Wheeler. The cedent, which issued a series of umbrella policies, purchased the fac certs from the reinsurer. The fac certs all had a notice provision that stated “Prompt notice shall be given to the Reinsurer by the Company of any occurrence or accident which appears likely to involve this reinsurance.”
A settlement with Foster Wheeler by one plaintiff prompted the cedent to consider its own settlement, which it finally reached in 2006. Although the cedent was aware of Foster Wheeler’s settlement demand in October 2003, it did not notify the reinsurer about the claim until January 2007; after the settlement. The reinsurer resisted the loss cession based on late notice and this action was commenced.
The case came down to whether Illinois or New York law applied. The court described the choice-of-law analysis and the differences the court found in each jurisdiction's law concerning late notice. The court agreed with the Magistrate Judge that Illinois law should apply. The court then determined that the 7th Circuit’s ruling on late notice--that the reinsurer need not prove prejudice to avoid coverage--was the rule of law that applied in this case. The court found that the cedent, a sophisticated insurance company, waited more than three years before giving notice to the reinsurer even though the cedent was aware that coverage under the fac certs was available and that the notice provision was triggered. Under Illinois law, held the court, the reinsurer could refuse coverage under the fac certs.
Giving prompt notice of a claim or potential claim is something that affects many types of insurance, including lawyers and brokers errors and omissions policies. Insureds are always advised by good lawyers to give notice to their carrier as soon as possible. That advice also applies to cedents where the loss triggers coverage under a reinsurance contract. Why wait to give notice?