Third Circuit Says Reinsured’s Failure to Satisfy “Condition Precedent” Notice Provision Bars Reinsurance Recovery, Regardless of Whether Reinsurer Was Prejudiced
Applying New York law, the Third Circuit held that a notice provision in a reinsurance certificate expressly containing “condition precedent” language requires notice to the reinsurer promptly after a claim or occurrence is reported to the reinsured company, and that a failure to comply with this provision results in the forfeiture of coverage, regardless of whether the reinsurer was prejudiced by the late notice. Pacific Employers Ins. Co. v. Global Reinsurance Corp. of Am., Nos. 11-3234, 11-3262 (3d Cir. Sept. 7, 2012).
A predecessor of Global Reinsurance Corp. issued a reinsurance certificate to Pacific Employers Insurance Company. The operative notice provision in the certificate stated: “As 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.” The Third Circuit held that this provision required Pacific Employers to provide Global with a definitive statement of loss promptly after claims were reported to Pacific Employers, not promptly after Pacific Employers first demanded payment from Global. In reaching this conclusion, the court noted that prompt notice allows the reinsurer to “assess for itself whether the matter might develop into something so significant that it could activate its reinsured layer” and permits the reinsurer to establish adequate loss reserves and/or elect to associate in the defense of the claims. The Third Circuit further held that because the notice provision, unlike other provisions in the certificate, explicitly makes prompt notice a condition precedent to Global’s indemnity obligation, a failure to comply with its terms results in the forfeiture of coverage altogether—not merely a forfeiture of the right to prompt payment as argued by Pacific Employers.
The Third Circuit applied New York rather than Pennsylvania law (which was applied by the district court) to determine whether the reinsurer must show prejudice as a result of the late notice in order to deny coverage. Although the Pennsylvania Supreme Court has not specifically ruled on the issue of prejudice, the Third Circuit “assumed without deciding, solely for the sake of [the] choice-of-law analysis, that Pennsylvania would apply a must-show-prejudice rule to reinsurance contracts, even when the contract makes the notice provision an express condition precedent to coverage,” as the district court had ruled. In contrast, the Third Circuit determined that under New York law, “when a reinsurance contract expressly requires a reinsured to provide its reinsurer with prompt notice of a claim or occurrence as a condition precedent to coverage and the reinsured fails to do so, that failure excuses the reinsurer from its duty to perform, regardless whether the reinsurer suffered prejudice as a result of the late notice.” Here, Pacific Employers first received notice of certain asbestos-related bodily injury claims in April 2001, yet did not notify Global of those claims until April 2008. Although Pacific Employers claimed that in October 2005, it directed its broker to keep all reinsurers informed about the relevant claims, Global was not so informed until 2008. Finding both the four and seven year delay untimely as a matter of law, the Third Circuit remanded the matter to the district court with instructions to enter a judgment of non-liability in favor of Global.