A New Jersey district court rejected a retrocessionaire’s late notice defense, finding that the notice provision did not create a condition precedent to coverage. Munich Reinsurance America, Inc. v. American National Ins. Co., 2012 WL 4475589 (D.N.J. Sept. 28, 2012). The court also rejected the retrocessionaire’s interpretation of an “ultimate net loss” provision, but reserved judgment as to the retrocessionaire’s rescission claim.
The dispute arose out of a retrocessional agreement between Munich and ANICO relating to Munich’s reinsurance of a workers’ compensation program insured, in turn, by Everest. Under the Munich-Everest agreement, Munich had no liability for any claim less than $250,000 but was responsible for the layer between $250,000 and $750,000. Under the excess-ofloss retrocessional agreement between Munich and ANICO, ANICO’s liability attached at the $500,000 level.
ANICO argued that it was entitled to deny payment on certain claims that Munich submitted in an untimely manner. The central question was whether the notice provision made immediate notice a condition precedent to payment, in which case untimely notice would result in the forfeiture of coverage. The court concluded that policy language requiring Munich to report claims “immediately, regardless of any question of liability [ ] or coverage” did not create a condition precedent notice requirement. In so ruling, the court relied, in part, on another clause within the notice provision stating that Munich’s failure to timely advise ANICO of loss “shall not be held to prejudice [Munich]’s rights.” Although the court declined to adopt a bright-line rule requiring specific “condition precedent” verbiage, it held that absent “condition precedent” wording (or a similarly “clear statement [ ] of intent”), it would interpret the notice provision as “an ordinary contractual covenant” rather than a condition precedent to coverage.
Because the notice provision did not create a condition precedent to coverage, the court held that a denial of coverage on the basis of untimely notice required a showing of prejudice. ANICO argued that Munich’s untimely notice “changed the mix of total reserve or loss information” relied upon by ANICO and affected ANICO’s commutation decisions. The court found these assertions insufficient to substantiate a finding of prejudice, and granted Munich’s summary judgment motion on the late notice defense.
The court also resolved the parties’ dispute over the meaning of the term “ultimate net loss.” The retrocessional contract provided that “[ANICO] shall not be liable for any loss hereunder until [Munich’s] ultimate net loss, each loss occurrence exceeds $500,000. [ANICO] shall then be liable hereunder for the amount of ultimate net loss in excess of $500,000 …” Munich argued that once Munich and Everest collectively paid $500,000, ANICO was required to pay (the so-called “ground up” basis). In contrast, ANICO argued that Munich alone was required to pay $500,000 before ANICO was obligated on its policy (the so-called “net retained” basis). The court sided with Munich, finding that “ultimate net loss” included payments by both Munich and Everest, and did not require $500,000 in payments by Munich alone.
Finally, the court addressed but did not resolve ANICO’s rescission claim based on Munich’s failure to disclose internal risk calculations. The court noted that resolution of this claim turned on several issues, including whether Munich’s internal analysis would have materially affected ANICO’s underwriting process and whether Munich had a common law or contractual obligation to provide the analyses. The court also reserved judgment as to whether ANICO had waived its right to rescission by failing to seek rescission within a reasonable period of time.