A Pennsylvania federal court recently held that, in order to prevail on a late notice defense, a reinsurer was required to show that it was prejudiced by a cedent’s breach of a facultative certificate’s notice provision, despite the fact that compliance with that provision was a condition precedent to coverage.   See Pacific Employers Ins. Co. v. Global Reinsurance Corp., No. 09-6055 (E. D. Pa. 2011).

Global Reinsurance Corporation of America provided facultative reinsurance coverage to Pacific Employers Insurance Company (“PEIC”).  The facultative certificate at issue required PEIC to provide Global with prompt notice of certain types of claims.

A dispute arose between the parties concerning certain claims billed by PEIC under the facultative certificate.  Global denied coverage based upon, among other things, late notice, and moved for summary judgment on that basis.  In support of its motion, Global argued that PEIC’s compliance with the certificate’s notice provision was a condition precedent to coverage.

The court agreed with Global and found that the facultative certificate’s notice clause clearly and unambiguously operated as a condition precedent to coverage. Nonetheless, the court held that Global was required to prove that it was prejudiced by PEIC’s alleged late notice in order to deny coverage on this basis.  To that end, the court noted that a conflict exists between New York and Pennsylvania law, the application of which was disputed by the parties.  Under New York law, a reinsurer does not have to establish prejudice to prevail on a late notice defense where a reinsurance contract requires prompt notice of claims as a condition precedent to coverage.  By contrast, the court noted that a reinsurer asserting this defense under Pennsylvania law must establish prejudice.  Because the court found that Pennsylvania law applied, it denied Global’s motion on the grounds that it failed to allege facts illustrating that it had been prejudiced by PEIC’s late notice.

Click here to review the court’s decision.