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AIU Insurance Co. v. TIG Insurance Co. (S.D.N.Y. 2013)

Issue Discussed: Notice

Submitted by Rick Rosenblum, Katharine Southard

Date Promulgated: March 25, 2013

Issues Decided: Whether a reinsured’s notice of a claim to reinsurer over three years after reinsured had knowledge of the claim satisfies notice provision requiring “prompt” notice of all claims


Background

In the late 1970s and early 1980s, Liberty Mutual Insurance Company insured Foster Wheeler, a company that used asbestos in its products, and AIU Insurance Company (“AIU”) issued excess policies to Foster Wheeler that covered certain losses beyond the limits of Foster Wheeler’s primary coverage through Liberty. AIU reinsured a number of its policies with a predecessor-in-interest of TIG Insurance Company (“TIG”). On August 7, 2007, AIU brought suit against TIG in the U.S. District Court for the Southern District of New York, asserting claims for breach of contract and declaratory judgment concerning TIG’s liability under certificates of facultative reinsurance (“Fac Certs”) that TIG’s predecessor-in-interest had issued to AIU. Each of the Fac Certs at issue contained essentially identical substantive terms set forth on preprinted forms, including identical notice provisions. More than two decades after AUI’s purchase of the CFRs, and over three years after AUI had knowledge of the claim at issue, AUI notified TIG of its claim, which TIG denied on the basis that AUI failed to provide “prompt notice” of the claim as required by the notice provision. AUI received a demand letter from its insured, Foster Wheeler, in October 2003, but did not notify TIG that a claim had been made against AIU until January 2007.

In its cross-motion for summary judgment, AUI argued that New York law applies to the CFRs and that TIG must therefore prove not only that AIU’s notice was late, but that TIG suffered prejudice as a result. TIG argued that Illinois law applies and that TIG therefore need only prove that AIU’s notice was late to show denial of coverage was proper.


Holding

The Court first looked to the choice of law principles of the forum state, New York, to determine which state’s substantive law applied, noting that in the specific context of reinsurance disputes, “‘the state where the reinsurance certificate issued and the location where performance is expected, i.e. the place to which the ceding insurer must make its demand for payment, typically control for purposes of choice of law.’” 2013 WL 1195258, at *4 (quotingFolksamerica Reinsurance Co. v. Republic Ins. Co., 2003 WL 22852737, at *5 (S.D.N.Y. Dec. 2, 2003)). The Court thus held that because, inter alia, all the CFRs were executed in Illinois (the last act necessary to make the CFRs binding was a countersignature by an authorized representative of TIG and all CFRs were countersigned in Illinois) and AIU agreed to perform there, Illinois law applied.

Next, the Court analyzed Illinois law to determine what rules to apply and found that no Illinois Supreme Court or lower Illinois appellate court decisions on late notice exist. Though the Court observed that the Illinois state courts had been silent on the issue, the Court found that the Seventh Circuit had opined on the Illinois law of late notice in the context of reinsurance claims in Keehn v. Excess Insurance Co. of America, 129 F.2d 503 (7th Cir. 1942), a decision issued more that 70 years prior. TIG argued that Keenh is nonetheless binding on the Court as a result of the Second Circuit’s opinion inFactors Etc., Inc. v. Pro Arts, Inc., 652 F.2d 278 (2d Cir. 1981). The Court examined the Second Circuit’s opinion in Factors and ultimately concluded that the Factors decision was binding and compelled the Court to defer to the decision(s) of the local federal circuit on a question of unsettled state law from a state within that circuit.

Therefore, the Court looked to Keehn, the only applicable federal appellate decision, to inform its application of Illinois late notice law, first analyzing whether there had been any subsequent developments in Illinois law in the 70 years since the Keehn decision that would displace the Keehn decision. Concluding that there have not been any such developments, the Court followed the rule articulated in Keehn that, under Illinois law, a notice provision in a reinsurance contract is a condition precedent to recovery, notwithstanding the lack of clear language supporting that reading in the contract itself.

Having determined that Illinois law does not require a reinsurer to prove that it was prejudiced by late notice before denying coverage, the Court turned its analysis to whether AUI’s notice to TIG was late, as late notice alone would defeat AUI’s claim. The parties agreed that the notice provision in the CFRs was triggered, at the latest, by AUI’s receipt of Foster Wheeler’s demand letter dated October 28, 2003. The identical notice provisions included in each of the CFRs at issue stated: “Prompt notice shall be given to the Reinsurer [TIG] by the Company [AUI] of any occurrence or accident which appears likely to involve this reinsurance . . . .” Therefore, the Court’s inquiry was limited to whether AIU’s notice to TIG over three years later on January 25, 2007 was “prompt” within the meaning of that term in the notice provision.

The Court held that, under Illinois law, “a party’s obligation under a ‘prompt’ notice provision [is] satisfied if the party gives notice within a ‘reasonable’ amount of time.” 2013 WL 1195258, at 12 (citing W. Am. Ins. Co. v. Yorkville Nat’l Bank, 939 N.E.2d 288, 293-94 (Ill. 2010)). The Court then analyzed the five factors that the Illinois Supreme Court has held must be analyzed when determining whether notice was given within a reasonable amount of time: “‘(1) the specific language of the policy’s notice provision; (2) the insured’s sophistication in commerce and insurance matters; (3) the insured’s awareness of an event that may trigger insurance coverage; (4) the insured’s diligence in ascertaining whether policy coverage is available; and (5) prejudice to the insurer.’” Id. (quoting Yorkville, 939 N.E.2d at 293-94). Finding that factors (2), (3), and (4) weighed against finding that notice was reasonable and emphasizing that AUI waited more than three years before notifying TIG of its claim, the Court concluded that TIG did not receive reasonable notice and that AUI may therefore refuse coverage under the CFRs.