Utica Mutual Ins. Co. v. Fireman’s Fund Ins. Co.
Issue Discussed: Notice
Submitted by Lawrence S. Greengrass, Ann E. Halden*
Date Promulgated: February 9, 2015
Utica Mutual Ins. Co. v. Fireman’s Fund Ins. Co., 2015 WL 521024 (N.D.N.Y. Feb. 9, 2015)
Court: United States District Court, Northern District of New York
Issues Decided: Whether a reinsurer who commuted its reinsurance before certain claims were untimely reported by its reinsured can assert late notice and bad faith defenses to avoid those claims.
A reinsurer asserted that it was harmed when it entered into commutations with some of its retrocessionaires prior to its reinsured reporting the claims at issue. The reinsurer alleged late notice and bad faith defenses to the claims.
In considering the reinsurer’s late notice defense, the District Court reiterated the holding in Unigard Security Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576 (1992), stating that in order to advance a late notice defense, a reinsurer is required to demonstrate that it was prejudiced by the ceding insurer’s late notice. The court further noted that the reinsurer has the burden of proving prejudice, which must be in the form of a tangible, economic injury resulting from the late notice. In Utica, the District Court held that the reinsurer had presented adequate evidence showing that it was prejudiced during commutation discussions with its reinsurers by its reinsured’s late notice of claims, and the court therefore denied summary judgment to the reinsured. The court noted that if the reinsurer could establish at trial it was prejudiced, it would be entitled to complete relief from its duty to indemnify the reinsured for the late reported claims.
With respect to the reinsurer’s bad faith defense, the court held that, in addition to showing it was prejudiced, the reinsurer could also be relieved from indemnifying its reinsured if it could show that the reinsured acted in bad faith in failing to provide timely notice. Bad faith could be shown not only by deliberately not reporting a claim, but also by “gross negligence or recklessness” in failing to report a claim. The court therefore noted that if the reinsured failed to implement routine practices and controls to ensure timely notification of claims, the reinsured could be found to have acted with gross negligence and the reinsurer may then be relieved from indemnifying the reinsured for the late reported claims.
A reinsured’s claim for indemnification can be barred if the reinsurer can prove that it suffered prejudice in the form of economic injury from the ceding insurer’s late notice or if the reinsurer can prove that the ceding company acted in bad faith in failing to provide timely notice.
* 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.