A disappointed ceding carrier is seeking reconsideration of a recent Third Circuit Court of Appeals case in which the court applied New York law to deny reinsurance coverage because of late notice. Pacific Employers Insurance Company v. Global Reinsurance Corporation of America, 2012 U.S. App. LEXIS 18835. The case construes a frequently-used notice provision in reinsurance contracts under New York law to permit coverage denial for late notice even if there is no prejudice to the reinsurer. The decision also predicts in dictum that Pennsylvania law would rule the other way.
The underlying insured, Buffalo Forge, purchased a primary policy from an unrelated insurer and an excess policy from a predecessor to Pacific Employers. Pacific Employers purchased facultative reinsurance on the excess policy from a predecessor to Global. The reinsurance certificate provided that “[A]s a condition precedent, the Company shall promptly provide the Reinsurer with a definitive statement of loss on any claim or occurrence reported to the Company and brought under this Certificate which involves a death, serious injury or lawsuit.”
Ten years after Buffalo Forge purchased the excess policy, in the early 1990’s, claimants across the country began inundating it with asbestos related lawsuits. Buffalo Forge first notified the excess carrier of these claims in 2001. Beginning in 2005, and continuing for the next three years, the excess carrier instructed its broker to advise the reinsurers. For reasons not explained, the broker failed to do so. Notice was first given to the reinsurer in 2008 when the excess carrier demanded payment of $560,000. The reinsurer denied coverage based on late notice.
The Third Circuit held that the notice of loss provision unambiguously required notice to the reinsurer of the claims in question and that under New York and Pennsylvania law the notice provision is a condition precedent to reinsurance coverage. Under New York law, the condition precedent denies coverage regardless of prejudice to the reinsurer. Predicting Pennsylvania law, the Third Circuit concluded in dicta that a reinsurer must show prejudice from late notice even when prompt notice is an express condition precedent to coverage. Based upon the numerous factual contacts with New York and its interest in enforcing express notice provisions, and the lack of any material contacts with Pennsylvania, the Third Circuit applied New York law and denied coverage to the ceding carrier.
This federal appellate decision is not binding on Pennsylvania state courts, and the Pennsylvania Supreme Court normally exercises its independent judgment on unsettled questions of substantive law. The Third Circuit prediction that Pennsylvania would apply a prejudice standard in the reinsurance context and in the face of a condition precedent requiring notice is dictum and far from certain in any event. The Third Circuit relied on the 1977 decision in Brakeman v. Potomac Insurance Company, 371 A.2d 193 (Pa. 1977) that is easily distinguishable as a case involving primary insurance and not involving an express condition precedent similar to the Global reinsurance contract. The current Supreme Court of Pennsylvania has also indicated in more recent cases its reluctance to undo clear contractual provisions unless they clearly are contrary to public policy. Reinsurance contracts are not contracts of adhesion-- ceding companies and their brokers have choices and can negotiate terms and conditions unlike many primary insureds.
From a practical perspective, the age old lesson is clear. Prompt reporting of claims as required by insurance or reinsurance contracts can avoid a mountain of troubles. And, when dealing through a reinsurance broker, ceding companies should not assume, but verify, that the broker gives prompt notice to the reinsurer.