CNA Reinsurance of London Ltd. v. Home Ins. Co.

Issue Discussed: Rescission and Reformation

Submitted by Michele Jacobson, Michael Fernandez

Date Promulgated: September 3, 1992

CNA Reinsurance of London Ltd. v. Home Ins. Co., 1990 WL 3231 (S.D.N.Y. Jan. 10, 1990)

Court:  United States Court of Appeals for the Second Circuit

Issue Decided:  Whether the failure to disclose a separate product line to a reinsurer is grounds for rescission by the reinsurer where there was no evidence that the cedent considered that fact to be material? (The case discusses other issues, such as late notice, ex gratia payments and the duty of the cedent to the reinsurer, which are not discussed herein.)

Key Holdings
Cedent provided excess products liability insurance which was reinsured by the reinsurer through facultative reinsurance certificates.  The reinsurer sought to rescind on the ground that the cedent had failed to disclose that the policyholder distributed ATVs, and that had the cedent done so, the reinsurer would have underwritten the reinsurance at a higher premium.  The Court held that, as a result of the duty of utmost good faith, a cedent has the obligation to disclose to its reinsurer all facts that materially affect the risk of which it is aware, and of which the reinsurer is unaware.  Under New York law, a fact is material so as to void an reinsurance contract if the reinsurer would either not have written the reinsurance or would have done so only at a higher premium.  However, the Court also held that the party with a duty to disclose must at least have reason to believe that the fact is material.  The Court affirmed the district court’s dismissal of the reinsurer’s misrepresentation claim because the reinsurer had failed to plead that the cedent should have known that the reinsurer’s decision to reinsure would have been affected by the disclosure of ATVs.

Key Takeaways
A party with a duty to disclose must at least have reason to believe that the fact not disclosed is material. Thus, under New York law, a reinsurer is not entitled to rescind a reinsurance contract simply where the undisclosed fact was material; the reinsurer must also show that the reinsured was aware that the fact was material and nonetheless failed to disclose it.