Defendants, certain ceding companies, appealed a judgment from the U.S. District Court for the Southern District of New York holding them liable for fraudulently inducing the plaintiff reinsurer to enter into two reinsurance facilities. The defendants also appealed the portion of the judgment finding (a) that the cedents waived their right to arbitration by pursuing it in a summary judgment motion instead of at the outset of the dispute and (b) that the reinsurer’s claims sounded in fraud (as opposed to contract) and were thus not arbitrable under a provision in a facultative reinsurance agreement providing for arbitration of disputes “arising out of the interpretation of this agreement.” Click here to review a complete blog post about the district court’s decision.

The U.S. Court of Appeals for the Second Circuit affirmed the district court’s finding that the reinsurer’s claims sounded in fraud, and thus held that those claims were not arbitrable under the relevant arbitration agreement (but declined to address the waiver issue, noting its ruling made the issue moot). However, the Second Circuit reversed the portion of the judgment holding the ceding companies liable for the fraudulent inducement claims, finding them to be time-barred by the statute of limitations.

Under New York law, a claim for fraud must be commenced either within six years from the commission of the fraud or within two years from the date the fraud was discovered, or could have reasonably been discovered, whichever is later. The jury had found that the reinsurer could not have reasonably discovered the fraud until after December 2, 2003, which was less than two years from the date the reinsurer filed suit. The Second Circuit disagreed with this finding, noting that the reinsurer was on notice before December 2, 2003 of the alleged misrepresentations (i.e., that the facilities would operate on a facultative obligatory basis, instead of as purely facultative contracts which allowed the ceding companies to pass off bad risks). The Second Circuit found that this evidence triggered the reinsurer’s duty of inquiry, and imputed to it knowledge of the alleged fraud. As such, the court held that the fraudulent claims were time-barred.

Click here to review a copy of the Second Circuit’s opinion, entitled AXA Versicherung AG v. New Hampshire Ins. Co., et al., No. 08-cv-2521 (Aug. 23, 2010).