Lexington Ins. Co. v. Sirius America Ins. Co.
Issue Discussed: Notice
Submitted by Lawrence S. Greengrass, Ann E. Halden*
Date Promulgated: September 15, 2014
Lexington Ins. Co. v. Sirius America Ins. Co., 2014 WL 4646852 (N.Y. Sup. Ct. Sept. 15, 2014)
Court: New York Supreme Court, New York County
Issues Decided: Whether a reinsurer may assert a late notice defense where some contracts require prompt notice as a condition precedent and others do not contain that language and the reinsurer has not shown actual economic injury, but asserts that the late notice was a result of the reinsured’s bad faith.
A ceding company reached a settlement with its insured for asbestos claims, but did not provide notice of the settlement to its reinsurer until it billed its reinsurer for the settlement years later. The reinsurer noted the late reporting for the initial billing and paid the billing but declined the subsequent billings, arguing that the reinsured failed to provide prompt notice as required by the facultative certificates. The reinsurer argued that prompt notice was a condition precedent to coverage under certain of the certificates, and while prompt notice was not a condition precedent under the remaining certificates, the reinsurer argued that it had no indemnity obligation for the claims because the reinsured acted in bad faith in failing to provide timely notice. The reinsurer also alternatively argued that it was prejudiced by the untimely notice of the claims.
With respect to the reinsurer’s argument that the certain certificates required “prompt” notice as a condition precedent to indemnification, the court held that because the ceding company failed to provide notice until four years after the settlement, notice was late as a matter of law. Therefore the reinsured failed to meet the condition precedent to indemnification and could not recover under the reinsurance. However, the court held that by paying the first billing, the reinsurer had waived its rights to claim late notice with respect to that billing.
With respect to the certificates that did not contain the condition precedent language, the court held that the reinsurer failed to show that it had suffered any economic injury as a result of the untimely claims, and therefore could not avoid its obligations under these certificates.
In response to the reinsurer’s argument that even absent prejudice, the reinsured is not entitled to indemnification because its failure to provide timely notice was due to bad faith or gross negligence in failing to have routine practices and procedures in place to ensure notification, the court held that New York state courts had not adopted this exception to the prejudice rule adopted by the federal courts, and denied the reinsurer relief on these grounds.
Where a contract requires prompt payment as a condition precedent to indemnification, the reinsurer is not required to prove prejudice, but may however waive its right to enforce the condition precedent by its actions. Where a contract does not contain a provision requiring notice as a condition precedent, the reinsurer must prove it was prejudiced by the untimely reporting of the claim. Finally, while federal courts have created an exception to the requirement that reinsurers show prejudice for late reported claims, New York State courts have not yet adopted the bad faith exception.
* Lawrence S. Greengrass is Senior Counsel and Ann E. Halden is Special Counsel at Mound Cotton Wollan and Greengrass LLP, where they specialize in reinsurance litigation and arbitration.