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.