Matter of Union Indem. Ins. Co. of N.Y.

Issue Discussed: Rescission and Reformation

Submitted by Michele Jacobson, Michael Fernandez

Date Promulgated: November 14, 1996

Matter of Union Indem. Ins. Co. of N.Y., 89 N.Y.2d 94 (1996)

Court:  Court of Appeals of New York

Issue Decided:  Is an insurer’s insolvency a material fact that must be disclosed, pursuant to the duty of uberrimae fidei, to prospective reinsurers during negotiations of a reinsurance agreement?

Is the above-referenced failure to disclose an adequate basis for rescission of a reinsurance contract, or is such remedy precluded by New York’s insurance liquidation scheme?

Key Holdings
Following the Cedent’s failure to disclose that it was insolvent during the negotiation of various reinsurance agreements, the reinsurer alleged fraud in the inducement and sought rescission of the aforementioned agreements. Affirming a grant of summary judgment in favor of the reinsurer, the Court of Appeals held that the duty of utmost good faith requires the disclosure all material facts. Since insolvency “has a potent potential impact on the reinsurers’ risk sufficient to trigger the uberrimae fidei obligation of disclosure, the cedent’s failure to disclose its insolvency justified voiding of the reinsurance treaties as against both the Liquidator, which had assumed the role of the insolvent insurer, and the beneficiary, which held a bond issued by the insolvent insurer. The Court further rejected the liquidator’s contention that New York’s insurance liquidation scheme precluded the reinsurer’s defense of fraud and entitlement to the rescission.

Key Takeaways
A cedent is under a per se obligation to disclose its potential insolvency. The failure to disclose such a condition will be cause for rescission of a reinsurance agreement.