Over the last year there have been important decisions by US courts concerning cedants’ obligations to notify their reinsurers of claims on a timely basis.
In two of these cases, Insurance Co. of the State of Pennsylvania v Argonaut Ins. Co, 2013 US Dist. LEXIS 110597 (S.D.N.Y. Aug. 6, 2013) and Granite State Ins. Co v Clearwater Ins. Co, 2014 US Dist. LEXIS 44573 (S.D.N.Y. March 31, 2014), the courts ruled that a cedant’s failure to provide timely notice may relieve a reinsurer from liability without a showing of prejudice if the cedant’s late notice was in bad faith (ie the cedant’s late notice was due to gross negligence, recklessness or wilful conduct).
The Argonaut decision is the first time a court has held that there is a bad faith exception to the general rule under California law that reinsurers must prove prejudice when denying an untimely reported claim. In holding that such an exception should be recognised in California, the Argonaut court noted that reinsureds under California law owe reinsurers a duty of utmost good faith and, as part of that duty, must provide reinsurers with all information material to the underlying risk. The court also relied on cases in which the federal appellate court in New York stated in dicta – more than twenty years ago – that a cedant’s failure to provide timely notice of a claim may bar recovery if the cedant acted in bad faith. See Argonaut, 2013 US Dist. LEXIS at *40-44) (citing Unigard Sec. Ins. Co. v North River Ins. Co 4 F.3d 1049, 1069 (2d Cir. 1993) and Christiania Gen. Ins. Corp. v Great American Ins. Co., 979 F.2d 268, 281 (2d Cir. 1992)).
Clearwater breaks new ground in that it is the first time a court has ruled under New York law that a reinsurer did not have to pay an untimely reported claim based on the bad faith exception to the prejudice rule. The Clearwater decision (which was decided by a federal trial court in New York), however, appears to be at odds with a recent decision by a New York State trial court which declined to recognise the bad faith exception under New York law in New Hampshire Ins. Co v Clearwater Ins. Co, 2013 N.Y. Misc. LEXIS 5117 (N.Y. Sup. Ct. Oct. 31, 2013). Both the Clearwater and New Hampshire cases are on appeal so the reinsurance market has not yet heard the last word with respect to this issue under New York law.
Nevertheless, at least for the time being, reinsurers may cite Argonaut and Clearwater to argue that they should not be responsible for untimely claims that they contend were notified to them in bad faith.