Although late notice cases are infrequent, 2012 featured some notable decisions, highlighting the implications of choice-of-law and state-law differences on the requirement of a show of prejudice. For instance, in Pacific Employers Ins. Co. v. Global Reinsurance Corp. of Am., 693 F.3d 417 (3d Cir. 2012), the Third Circuit reversed a lower court decision and ruled that a reinsurer had no obligation to indemnify its cedent for certain asbestos-related losses due to late-notice of loss given by the reinsured.
The reinsurance certificate required that "[a]s a condition precedent, [the cedent] shall promptly provide the Reinsurer with a definitive statement of loss on any loss or occurrence." The cedent had received initial notice of the claim in April 2001 and the underlying loss reached the excess layer by 2004. The broker, however, failed to keep the reinsurer advised about the claim despite repeated requests by the reinsurer, and ultimately the reinsurer denied coverage and asserted a late notice defense. The district court found that the reinsurance certificate unambiguously required the cedent to provide a definitive statement of loss promptly after the initial claim from the underlying insured and that the definitive statement of loss was a condition precedent to recovery. The certificate, however, failed to include an explicit choice of law provision. This issue was critical because although New York law on late notice generally requires a showing of prejudice, there is an exception where the reinsurance contract has an explicit condition precedent notice requirement, as was the case here. Under Pennsylvania law, however, prejudice was arguably a requirement for succeeding on a late notice defense. The district court applied Pennsylvania law and concluded that the reinsurer had failed to allege facts supporting a finding of prejudice.
On appeal, the Third Circuit reversed. The Third Circuit 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 cedent was located in California. The only connection to Pennsylvania was that the cedent had become a Pennsylvania company in 1999. Although not easily ascertainable because the minimal negotiations of the certificate occurred via telex, the court ultimately determined that the place of contract formation was 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 Third Circuit thus ruled that New York law applied and that the reinsurer was not required to show prejudice in order to deny coverage.
A federal magistrate judge in a New York federal court also ruled on the issue of late notice in AIU Ins. Co. v. TIG Ins. Co., No. 07 Civ. 7052 (S.D.N.Y. Aug. 16, 2012). In a long-standing dispute over whether facultative certificates are required to respond to asbestos loss notices claimed to be late by the reinsurer, the magistrate judge recommended that the reinsurer's renewed motion for summary judgment be granted. The dispute involved a series of umbrella policies issued by the cedent to cover the insured's excess liabilities. The cedent reinsured its exposure through a series of facultative certificates. Each of the facultative certificates stated that "prompt notice shall be given to the Reinsurer by the Company of any occurrence or accident which appears likely to involve this reinsurance."
In 2001, a series of declaratory judgment actions and third-party actions were commenced over various insurers' obligations on asbestos bodily-injury claims brought against the insured. In 2006, the cedent settled with the insured and began making payments under the settlement agreement. In 2007, the cedent sought recovery under the facultative certificates for the settlement payments. The reinsurer rejected the cession based on the prompt notice provision of the certificates.
In finding for the reinsurer, the magistrate judge first found that Illinois law, not New York law, applied to the certificates, which meant that the reinsurer was not required to show prejudice from the late notice. After determining that Illinois law governed, the magistrate judge addressed the prejudice issue and found that, under Illinois law, prompt notice is a prerequisite to coverage under the certificates. The magistrate judge also found that there were no questions of fact as to whether the reinsurer had actual notice of the underlying claim and recommended summary judgment be granted to the reinsurer.