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Common reinsurance issues: follow the fortunes, late notice and rescission.

Law is evolving in each of these areas, while courts seek to balance cedents' expectations with reinsurers' contract rights

THERE are three legal issues that are common to many reinsurance disputes--follow the fortunes, late notice, and rescission. The law in each of these areas, while still evolving, attempts to balance the cedent's expectation that it will be reimbursed with the reinsurer's right to rely on the terms of the reinsurance agreement and on the good faith and diligence of the cedent in both the underwriting and claims handling process.


A. Use

Many reinsurance agreements contain a follow the fortunes clause, which provides that all settlements pursuant to the underlying insurance are binding on the reinsurer.(1) Even when a follow the fortunes provision is not expressly included in the agreement, courts have implied such a condition.(2) Courts also have applied the doctrine to both facultative and treaty reinsurance.(3)

Notwithstanding this widespread recognition of the doctrine, decisional law on its parameters is still developing. A federal district court in New York refused to vacate an opinion on the issue, even though requested by the parties who had reached a settlement following the decision, noting "that the important public interest in the development of decisional law definitively outweighs the settlement interests of the parties here."(4)

B. Purpose

The follow the fortunes doctrine is generally understood to mean, as stated in National American Insurance Co. v. Certaint Underwriters at Lloyd's London, that a reinsurer "may not challenge the reinsured's good faith and studied decision to pay on a claim that is arguably subject to the coverage of a valid insurance policy."(5) The Third Circuit declared in North River Insurance Co. v. Cigna Reinsurane Co. that the doctrine prevents "reinsurers from second guessing good-faith settlements and obtaining de novo review of judgments of the reinsured's liability to its insured."(6) The North River court also stated that the follow the fortunes doctrines is broader than the obligations imposed by a "following forms" clause, which obligates the reinsurer only to cover risks insured under the reinsured policy, adding that it obligates a reinsurer to indemnify "all payments made in good faith that are reasonably within the scope of the policy's coverage."

The decision whether a payment is reasonably within the scope of coverage is made by the cedent. In discussing the scope of a cedent's obligation to its reinsurer, the federal district court in Aetna Casualty & Surety Co. v. Home Insurance Co. stated:
      The reasoning that undergirds the "follow the settlements" doctrine does
   not require that a ceding company pursue every defense in litigation
   against the insured, however close a call the particular policy defense
   might be. Quite the contrary: subject to the ceding company's duty of
   utmost good faith, and the requirement that investigations such as the one
   conducted by [the cedent] be reasonable and businesslike, the doctrine
   leaves it to the ceding company to make the settlement decision in the
   first instance, which settlement is then binding upon the reinsurers.(7)

The rationale for the doctrine is that allowing reinsurers to relitigate coverage issues would put cedents in the untenable position of having coverage defenses that they might initially have advanced in defense of an insured's claim used against them by reinsurers seeking to disclaim liability for a subsequent settlement of the claim. The North River court observed, "Without 'follow the fortunes' doctrine, reinsureds would be in the impossible position of advancing defenses in coverage contests that could be used against them by reinsurers seeking to deny liability."(8)

C. Limits

Notwithstanding the broad scope of the doctrine, courts generally have been careful not to allow the doctrine to overwhelm the remainder of the reinsurance agreement. For example, in Bellefonte Reinsurance Co. Aetna Casualty & Surety Co., the Second Circuit rejected a cedent's argument that the follow the fortunes doctrine obligated its reinsurers to pay more than the limits of liability specified in the reinsurance agreement, noting that the cedent's argument "would strip the limitation clause and other conditions of all meaning; the reinsurer would be obliged merely to reimburse the insurer for any and all funds paid."(9)

The Third Circuit in North River expressed the limits of the doctrine:
      "Follow the fortunes" clauses prevent reinsurers from second guessing
   good-faith settlements and obtaining de novo review of judgments of the
   reinsured's liability to its insured. But while a "follow the fortunes"
   clause limits a reinsurer's defenses, it does not make a reinsurer liable
   for risks beyond what was agreed upon in the reinsurance certificate. In
   that regard, the reinsurer retains the right to question whether the
   reinsured's liability stems from an unreinsured loss. A loss would be
   unreinsured if it was not contemplated by the original insurance policy or
   if it was expressly excluded by terms of the certificate of

The follow the fortunes doctrine is limited by a cedent's duty of utmost good faith. There are, however, few reported decisions exploring the limits of the duty of good faith in this context. In North River, the Third Circuit held that the duty of good faith "requires the reinsured to align its interests with those of the reinsurer," but that to avoid an obligation to "follow" a settlement on the grounds that it was not made in good faith, a reinsurer must establish that the settlement was the result of "gross negligence or recklessness" on the part of the cedent and that the reinsurer suffered "economic prejudice" as a result. The court went on to rule that "bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract." The reinsurer bears the burden of proving that the cedent acted in bad faith.(11)

D. Scope of Judicial Review

Courts have limited the scope of judicial review of a reinsurer's argument that it is not bound by a cedent's settlement of a claim. In Aetna Casualty & Insurance Co. v. DR Insurance Co., the federal district court described the standard of review as a "court need only address whether an insured's request for payment from its reinsurer is made in good faith, is arguably within its policy, and does not exceed the reinsurer's liability cap."(12) The Third Circuit described the standard as a "deferential review of a determination of the insurer's liability to the insured."(13)

Nonetheless, reviewing courts have struggled to draw the line between paying deference to a cedent's good faith determination of coverage and preserving a reinsurer's right to avoid paying for losses that were not reinsured. North River involved a claim by the cedent to recover from a reinsurer defense costs paid by the cedent to the insured. The Third Circuit recognized that the dispute between the cedent and its reinsurer raised competing principles:
      On the one hand, in order to preserve "follow the fortunes" doctrine,
   courts may not conduct de novo review of a judgment imposing liability on
   the insurer. On the other, to protect the contractual intent of the
   parties, courts must reexamine the judgment to determine whether the
   liability represents a risk not contemplated by the terms of the underlying
   policy as reinsured.(14)

The court outlined what it termed a "deferential" standard of review of the cedent's coverage determination, but it held that "we do not believe that asking whether the risk was unreinsured is tantamount to de novo review." The court then went on to examine in great detail whether the defense costs were covered under the reinsured policy. Ultimately solving its dilemma by imposing on the reinsurer the burden to establish that the relevant state law "unambiguously provides that the policies do not pay defense costs," the court reversed a summary judgment in favor of the reinsurer after finding that the reinsurer could not sustain its burden to establish that the requested defense costs were "clearly outside the policy as reinsured."


A. Purpose

Many reinsurance agreements contain provisions requiring cedents to give "immediate notice" or notice "as soon as practicable" upon knowledge of an occurrence "likely to give rise to a claim" under the reinsurance agreement.(15) Courts have recognized that the notice clause serves a number of different purposes, including enabling a reinsurer to set appropriate reserves and associate in the defense of claims.(16)

In Unigard Security Insurance Co. v. North River Insurance Co., the Second Circuit grounded the notice obligations in the duty of utmost good faith at the center of the reinsurance relationship. As the court explained:
      [B]ecause information regarding risks lies with the ceding insurer, the
   reinsurance market depends upon a high level of good faith to ensure prompt
   and full disclosure. Absent such disclosure, reinsurers would have to
   duplicate actuarial and claims-handling efforts of ceding insurers, and
   reinsurance would become unavailable. Courts should thus adopt
   information-forcing default rules based on the good faith the reinsurance
   market demands.(17)

B. Viable Defense

Although the courts have no difficulty articulating the purpose of a notice provision, they have demonstrated a reluctance to strictly enforce such provisions.(18) As discussed below, the effects of late notice are often ameliorated by a failure on the part of the reinsurer to object promptly to the late notice or by a reinsurer's inability to demonstrate actual prejudice from the late notice.

Nonetheless, the defense of late notice is a viable one. The Circuit Court of Cook County, Illinois, for example, found that a cedent "must fail in its claims against all [reinsurers] in this cause because it breached an express obligation imposed upon by it by contract and by law" when it failed to report a claim for four years. The court concluded:
      Of the parties here in dispute, only [the cedent] Casualty had the
   information available to it. It also had a clear and knowing legal
   obligation, well established by industry standard and judicial precedent to
   meet. Casualty cannot avoid this undisputed fact or shirk the clear legal
   duty imposed upon it by the very nature of its business.... It is also
   worth noting what the consequences are for Casualty, having failed in its
   obligation to alert reinsurers of the substance of the ... claim. The only
   punishment visited on Casualty for failing to meet the standards imposed
   upon it by industry practice and law is that it, rather than the reinsurer
   from whom it withheld information, ... must bear the fiscal burden imposed
   by payments made on the ... claim. Hardly a draconian punishment.(19)

Similarly, in Constitution Reinsurance Corp. v. Stonewall Insurance Co.,(20) a New York federal district court granted summary judgment in favor of a reinsurer that did not receive notice of a claim until two years and two months after the cedent's duty to give notice was triggered. The court said the cedent's obligation to give notice was triggered, at the latest, when it received a settlement negotiation letter advising that the claim could be evaluated realistically as exceeding the reinsurance retention. A delay of more than two years was "unreasonable as a matter of law."

While the Second Circuit has required that reinsurers prove prejudice before they can prevail on a late notice defense, the court pointed out that there was no such requirement in this case because the reinsurance agreement expressly made timely notice a condition precedent to the reinsurer's obligation to indemnify.

C. Timing of Notice

In assessing whether or not a reinsured has provided "prompt" notice, courts generally apply an objective standard to what is necessarily a subjective determination. As articulated by the Second Circuit in Christiania General Insurance Corp. v. Great American Insurance Co.:
      Clauses in insurance contracts requiring "prompt notice," notice "as
   soon as practicable," or "immediate notice" are generally construed to
   require notice within a reasonable time after the duty to give notice has
   arisen. When the duty to provide such notice commences requires an
   objective evaluation of the facts known to the insured. The objective
   standard is one of reasonableness. While the duty to provide notice
   therefore does not begin on the basis of mere speculation, rumor, or remote
   contingencies far removed from the particular policy in question, when an
   insurer complying with its duty to use due diligence in investigating
   potential claims against it would believe from the information available
   that its policy would be involved, the notice obligation arises.(21)

In that case, the court emphasized a cedent's obligation to investigate potential claims to determine whether notice ought to be given to a reinsurer, noting that a cedent "cannot complain that it did not see something when it shut its eyes." The court also rejected the cedent's argument that the obligation to give notice arose only when it became clear that the underlying policy would be pierced on a "paid" rather than an "incurred" basis, noting that this standard, if adopted, would "eviscerate the reserve setting function of requiring prompt notice of claims that 'appear likely' to involve reinsurance."

Nonetheless, courts continue to struggle with the question of when the obligation to give notice is triggered. The Second Circuit, for example, once labeled a notice provision ambiguous as a matter of law, although it required notice "promptly of any occurrence which in the company's estimate of the value of injuries or damages sought, without regard to liability, might result in judgment in an amount sufficient to involve this certificate of reinsurance."(22)

There is no hard and fast rule for when notice is "prompt." The general standard is that notice must be given within a reasonable time under the circumstances. Courts have found that delays of five, eight and 12 months constitute late notice.(23)

D. Waiver

Some states require a reinsurer to object "promptly" to the late notice to avoid waiving the defense, and a delay of more than one year was found to constitute a waiver.(24)

E. Prejudice

Although the rule differs from jurisdiction to jurisdiction, most courts that have considered the issue have held that a reinsurer may avoid its indemnity obligations for late notice only on a showing of "prejudice."(25) The New York Court of Appeals

justified this requirement, which is contrary to New York's rule for late notice in the context of primary insurance, by noting that because a reinsurer has no obligation to defend, investigate or settle an insured's claims, the "failure to give the required prompt notice is of substantially less significance for a reinsurer than for a primary insurer." The court noted further that, because the follow the fortunes clause had the effect of aligning the interests of cedents and reinsurers in a cedent's claims-handling decisions, the factors that make prompt notice important in the context of primary insurance are "greatly diminished" in the reinsurance context.(26)

There is no clear standard for what constitutes "prejudice," and indeed many states formulate the requirement differently. Some jurisdictions hold that the loss of the right to "associate" with the cedent in the defense and control of the underlying claim or suit constitutes "prejudice."(27) Other jurisdictions have held that loss of the right to associate constitutes "prejudice" only if the reinsurer can prove that it would have exercised its right and that would have resulted in a more favorable result.(28)

This latter standard can be particularly problematic for a reinsurer that denies coverage for any reason in addition to late notice. As explained by the Ninth Circuit:
   [W]here an insurer denies coverage, a strong presumption arises that it has
   not suffered prejudice from late notice. The reason is that if an insurer
   takes the position that it is not liable under the policy, as the
   [reinsurer] do[es] here, then it experiences no prejudice by late
   notice--it merely denies coverage at a later date. To overcome this
   presumption the [reinsurer] "must show a substantial likelihood that, with
   timely notice, and notwithstanding a denial of coverage or reservation of
   rights, it would have settled the claim for less or taken steps that would
   have reduced or eliminated the insured's liability."(29)

Still other jurisdictions require proof of "tangible economic injury" resulting from the late notice.(30) At least one court has found that prejudice could be established if a reinsurer could prove that the late notice caused it to be underreserved or if it impaired a reinsurer's ability to recover from its retrocessionares.(31)

F. Bad Faith

In the absence of prejudice, a reinsurer may still prevail on a late notice defense in some jurisdictions if it can establish that the cedent acted in bad faith.(32) The only reported decision to define "bad faith" in the context of late notice is Unigard, in which the Second Circuit concluded that mere negligence was not sufficient to establish bad faith. The court held:
   [T]he proper minimum standard for bad faith should be gross negligence or
   recklessness. If a ceding insurer deliberately deceives a reinsurer, that
   deception is of course bad faith. However, if a ceding insurer has
   implemented routine practices and controls to ensure notification to
   reinsurers but inadvertence causes a lapse, the insurer has not acted in
   bad faith. But if a ceding insurer does not implement such practices and
   controls, then it has willfully disregarded the risk to reinsurers and is
   guilty of gross negligence. A reinsurer, dependent on its ceding insurer
   for information, should be able to expect at least this level of
   protection, and, if a ceding insurer fails to provide it, the reinsurer's
   late notice defense should succeed.(33)


Rescission of the reinsurance agreement is a remedy that may be available to reinsurers able to establish material misrepresentations in the process of underwriting the reinsurance agreement and, in some jurisdictions, material breaches of the reinsurance agreements after they are executed. Rescission is an equitable remedy, essentially voiding the reinsurance agreement and relieving a reinsurer of all obligations under the agreement.

A. Misrepresentations

A cedent's duty of utmost good faith to its reinsurers imposes on it a duty to "exercise good faith and to disclose all material facts."(34) The cedent's duty is "to place the underwriter in the same position as himself [and] to give to him the same means and opportunity of judging the value of the risks."(35) Unless asked, however, a cedent has no obligation to disclose what a reinsurer "already knows or ought to know" or to make a "minute" disclosure of every circumstance.(36)

The Second Circuit observed in Christiania: "The relationship between a reinsurer and a reinsured is one of utmost good faith, requiring the reinsured to disclose to the reinsurer all facts that materially affect the risk of which it is aware and of which the reinsurer itself has no reason to be aware."(37)

Thus, for example, a cedent is not obliged to disclose the terms of the underlying insurance policy where those terms are found generally in policies of that type, but it is required to disclose extended coverages or unusual terms.(38) The federal district court for Massachussets summarized the case law on a cedent's duty to disclose and rescission: "The trend in these modern cases has been to recognize rescission fidei as the traditional operative standard, but to interpret it so as to require rescission of reinsurance contracts only where the reinsured acted in bad faith or where the reinsurers suffered prejudice from the failure to disclose."(39)

In one case, reinsurers successfully rescinded a reinsurance agreement where they were misled by the cedent's brokers into believing that the cedent was retaining a portion of the risk. Concluding that it was not customary to reinsure the entire risk, the U.S. District Court for the Southern District of New York held that the cedent's duty to act in utmost good faith obligated it to disclose affirmatively to the reinsurers that it was seeking reinsurance of the entire risk.(40)

In another case, however, the U.S. District Court for the Northern District of Illinois reached a contrary conclusion, rejecting an argument that a cedent had an affirmative obligation to "correct a `misapprehension' on the part of the reinsurers that was not of its own making." The court noted that the reinsurers could have protected themselves against the risk of non-disclosure, stating:
      Reinsurers could require a higher percentage of retained risk, making
   sure that the reinsured has adequate incentive not to take undue risks or
   sacrifice the reinsurer's interests for the sake of customer relations.
   Reinsurers could require periodic audits of the insurer's underwriting and
   claims handling practices. And they could insist on the kind of express
   contract terms that the defendants claim are already implied: That the
   reinsurer is not required to reimburse if the insurer has been remiss in
   underwriting the risk or paying the underlying claim.(41)

In a case of first impression, the Court of Appeals of New York held that a cedent's failure to disclose its insolvency to its reinsurers was a sufficient basis for rescession. "Insolvency," the court held, "not unlike extended coverage or an unusual term, has a potent potential impact on the reinsurers' risk sufficient to trigger the rescission fidei obligation for disclosure."(42)

Reinsurance agreements may be avoided if the reinsurer can establish "undue concealment or intentional withholding of facts material to the risk, which ought in good conscience to be communicated," but a rescission claim based on fraud "cannot rest on a showing of mere negligent concealment."(43)

In Christiania, the Second Circuit stated that the standard for disclosure is "whether a reasonable insured should have believed the fact was something the insurer would consider material." It added:
      Nonetheless, that an undisclosed fact may have been material to the
   reinsurer does not itself enable a reinsurer to rescind because, though the
   failure to disclose need not be fraudulent or even intentional, the party
   with a duty to disclose must at least have reason to believe the fact not
   disclosed is material. Absent such belief, there is not actually a
   misrepresentation in the sense of a knowing failure to disclose. If [a
   cedent] cannot be charged with knowledge that as of the time the
   reinsurance certificates were entered into the risks posed by [the disputed
   product] required it in good conscience to list them specifically as among
   the risks insured, rescission is not available to [the reinsurer].(44)

Implicit in this standard is the requirement that the cedent know of the allegedly concealed fact and its materiality. "[W]hether the duty to disclose has been breached is not affected by whether the failure is intentional or inadvertent; rather the duty does not extend to facts of which the reinsured is not, and has no reason to be, aware of as material to the risk." Where a reinsurer specifically asks about a fact or issue, however, a cedent is on notice that the insurer considers it material and is therefore under a duty of inquiry.(45)

Some states recognize a distinction between "legal" fraud, which requires proof of intent on the part of the wrongdoer, and "equitable" fraud, which requires simply that there have been a misrepresentation, but does not require proof of intent.(46)

Materiality is dependent on the circumstances. "A fact is material so as to void ab initio an insurance contract if, had it been revealed, the insurer or reinsurer would either not have issued the policy or would have only at a higher premium," the Christiania court declared.(47) Materiality is generally a question of fact.

Even when concealment is established, a reinsurer also must establish reliance, and when a reinsurer can establish that it was induced by fraud to enter into a reinsurance agreement, the agreement is "void ab initio"; cancellation of the agreement is a customary form of relief.(48) At least one court, however, has held that, as a matter of public policy, a reinsurer would not be permitted to rescind its reinsurance agreement with an insolvent insurer because the burden of the unreinsured claims would fall on the insurer's policyholders or a state guaranty fund.(49)

If rescission is awarded, a reinsurer will most likely have to refund premiums received for the reinsurance.(50)

B. Breach

Some states allow rescission for breach of contract where the breach is material and substantial.(51) In the reinsurance context, a cedent's breach of its contractual obligations to make timely reports and to keep accurate records has been found to be a sufficiently material breach to justify rescission.(52)

C. Waiver by Conduct

A potential claim for rescission may be deemed waived if a reinsurer acts in a manner which is inconsistent with the right to rescind after learning of the cedent's misrepresentations. As the U.S. District Court for the District of Nebraska observed:
   In short, the case law makes clear that a party's right to rescind a
   contract may be barred, if after an unreasonable time after knowledge of
   the facts giving rise to the right, the party fails to declare a rescission
   and disclaim the benefits of the contract.(53)

Thus, for example, a reinsurer was found to have waived its right to rescission where it signed a cover note and issued a certificate of reinsurance after learning of the alleged misrepresentation and generally failed to take steps to assert its right to rescission within a reasonable time.(54) Similarly, a reinsurer that renews an agreement despite a belief that it was fraudulently induced to enter into the agreement may be deemed to have waived any claim based upon the alleged fraud.(55)

D. Waiver by Delay

Some states require that a reinsurer exercise its right to rescind within a "reasonable time" after learning of the fraud or misrepresentation. For instance, in American Home Insurance Co. v. Belvedere Insurance Co. Ltd., the federal district court in New York held that where a reinsurer learned of a cedent's misrepresentations in January 1987, engaged in settlement negotiations with the cedent until they broke down in November 1988 and thereafter did not "manifest its intent to rescind" until after the cedent filed suit in June 1989, the reinsurer's assertion of the power of avoidance had been lost.(56)

Where, however, the delay in rescinding the contract is attributable to the conduct of the party who made the misrepresentation or breached the contract, courts may be less inclined to find waiver.(57)

(1.) See, e.g., Bellefonte Reins. Co. v. Aetna Casualty & Sur. Co, 903 F.2d 910, 911-12 (2d Cir. 1990); Unigard Sec. Ins. Co. v. North River Ins. Co., 594 N.E.2d 571,574 n.2 (N.Y. 1992).

(2.) Nat'l Am. Ins. Co. v. Certain Underwriters at Lloyd's London, 60 F.3d 536 (9th Cir. 1995), published in advance sheet only; opinion withdrawn from bound volume, superseded by 93 F.3d 529 (9th Cir. 1995) (expert testimony that doctrine was tacit part of reinsurance agreements before routinely included in agreements); Aetna Casualty & Sur. Co. v. Home Ins. Co., 882 F.Supp. 1328, 1350 (S.D. N.Y. 1995); Int'l Surplus Lines Ins. Co. v. Certain Underwriters & Underwriting Syndicates at Lloyd's of London, 868 F.Supp. 917, 920 (S.D. Ohio 1994) (doctrine applies even if not in reinsurance contract).

(3.) Aetna Casualty, 882 F.Supp. at 1348. See also North River Ins. Co. v. Cigna Reins. Co., 52 F.3d 1194 (3d Cir. 1995).

(4.) Aetna Casualty, 882 F.Supp. at 1357-58.

(5.) Nat'l Am., 60 F.3d 536 (advance sheet only) and 93 F.3d 529. See also Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 280 (2d Cir. 1992)).

(6.) 52 F.3d at 1199)

(7.) 882 F.Supp. 1355, at 1351.

(8.) 52 F.3d at 1210.

(9.) 903 F.2d 910, at 913. Accord Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1070-71 (2d Cir. 1993); Mentor Ins. Co. v. Brannkasse, 996 F.2d 506, 517 (2d Cir. 1993); Christiania, 979 F.2d at 280; Arkwright Mut. Ins. Co. v. Nat'l Union Fire Ins. Co., 1995 WL 3006, at *4 (S.D. N.Y. 1995), not reported in F.Supp.

(10.) 52 F.3d at 1199-1200. Accord Allendale Mut. Ins. Co. v. Excess Ins. Co., 992 F.Supp. 271 (S.D. N.Y. 1997). See also 992 F.Supp. 265 and 278.

(11.) 52 F.3d at 1214-17.

(12.) 1995 WL 46640, at *5 (S.D. N.Y. 1995), not reported in F.Supp.

(13.) North River, 52 F.3d at 1204.

(14.) Id. at 1207.

(15.) See, e.g., Nat'l Am., 1995 WL 385396.

(16.) Christiania, 979 F.2d at 274. See also Jefferson Ins. Co. v. Fortress Re Inc., 616 F.Supp. 874, 878 (S.D. N.Y. 1984); Highlands Ins. Co. v. Employers' Surplus Lines Ins. Co., 497 F.Supp. 169, 173 n.3 (E.D. La. 1980).

(17.) 4 F.3d 1049, 1066 (2d Cir. 1993).

(18.) See, e.g., Christiania, 979 F.2d at 274 (absent express provision in contract making prompt notice condition precedent, reinsurer must show prejudice resulted from delay).

(19.) Casualty Ins. Co. v. Constitution Reins. Co., No. 91 L 14732, Circuit Court of Cook County, Illinois, January 22, 1996, reprinted in 6 Mealey's Litig. Rep.--Reins., Jan. 31, 1996.

(20.) 980 F.Supp. 124 (S.D. N.Y. 1997). See also Ins. Co. of Pa. v. Associated Int'l Ins. Co., 922 F.2d 516, 522 (9th Cir. 1990) (rejecting argument that entitled to notice only on cedent's "subjective determination that the reinsurance certificate would be impacted"); Ins. Co. of Ireland Ltd. v. Mead Reins. Corp., 1994 WL 605987 (S.D. N.Y. 1994), not reported in F.Supp. (cedent did not have "unfettered discretion" to determine when to notify reinsurers of a claim); Centaur Ins. Co. v. Safety Nat'l Casualty Corp., 1993 WL 434056, at *6 (N.D. Ill. 1993), not reported in F.Supp. (finding factual dispute as to whether cedent's exercise of its discretion in giving notice was "objectively reasonable"); Casualty Ins. Co., supra note 19.

(21.) 979 F.2d 268, 275-76.

(22.) Travelers Indem. Co. v. Scor Reins. Co., 62 F.3d 74 (2d Cir. 1995)

(23.) Unigard Sec., 4 F.3d at 1063; Stuyvesant Ins. Co. v. United Public Ins. Co., 221 N.E.2d 358 (Ind.App. 1966); Fortress Re Inc. v. Jefferson Ins. Co., 465 F.Supp. 333, 338 (E.D. N.C. 1978), aff'd, 628 F.2d 860 (4th Cir. 1980).

(24.) Nat'l Am., 1995 WL 385396 at *5 (applying California law).

(25.) Id. (California law requires proof of "actual and substantial prejudice"); Unigard Sec., 4 F.3d at 1069 (New York law requires proof of "tangible economic injury"); Ins. Co. of State of Pennsylvania v. Assoc. Int'l Ins. Co., 922 F.2d 516 (9th Cir. 1991); Fortress Re Inc. v. Central Nat'l Ins. Co., 766 F.2d 163 (4th Cir. 1985); Life & Health Ins. Co. v. Federal Ins. Co., No. CIV A. 92-6736, 1993 WL 326404, at *2 (E.D. Pa. Aug. 25, 1993) (even if cedent admits notice was late, reinsurer must prove it was "unduly prejudiced"); Travelers Ins. Co. v. Cen. Nat'l Ins. Co., 733 F.Supp. 522, 528 (D. Conn. 1990); Cen. Nat'l Ins. Co. v. Prudential Reins. Co., 241 Cal.Rptr. 773, 787 (Cal. App. 1987) (unpublished opinion) (late notice creates "rebuttable presumption" of prejudice). But see Liberty Mut. Ins. Co. v. Gibbs, 773 F.2d 15 (lst Cir. 1985) (rejecting argument prejudice required under Massachusetts law).

(26.) Accord Unigard Sec., 4 F.3d at 1068.

(27.) Keehn v. Excess Ins. Co. of Am., 129 F.2d 503, 505 (7th Cir. 1942) (applying Illinois law to hold that deprivation of the right to associate constitutes prejudice without any proof that results of litigation would have been different); Stuyvesant, 221 N.E.2d at 362 (eight-month delay in giving notice prejudiced reinsurer's right to assist and negotiate fair settlement); Casualty, supra note 19.

(28.) Fortress, 766 F.2d at 166-67; Ins. Co. of State of Pennsylvania, 922 F.2d at 524; Travelers, 733 F.Supp. at 530 (reinsurer could not prove prejudice from late notice where it lacked facilities or personnel to investigate or defend claims and where it failed to take any action after receiving notice of claim).

(29.) Nat'l Am., 60 F.3d 536 (advance sheet only) and 93 F.3d 529.

(30.) Unigard Sec., 4 F.3d at 1068 (New York law).

(31.) Ins. Co. of Ireland, supra note 20, at *8 (denying summary judgment on the grounds that these were factual issues).

(32.) See Christiania, 979 F.2d at 281; Fortress, 766 F.2d at 165-66. But see Zenith Ins. Co. v. Employers Ins. Co. of Wausau, 141 F.3d 300 (7th Cir. 1998) (under Wisconsin law, showing of prejudice from late notice is required in all circumstances).

(33.) 4 F.3d at 1069.

(34.) Compagnie de Reassurance d'Ile de France v. New England Reins. Corp., 57 F.3d 56 (lst Cir.), cert. denied, 116 S.Ct. 564 (1995).

(35.) Christiania, 979 F.2d at 280 (citation omitted); Allendale Mut. Ins. Co. v. Excess Ins. Co., 992 F. Supp. 278 (S.D.N.Y. 1998).

(36.) Compagnie, 57 F.3d 56. See also China Union Lines Ltd. v. Am. Marine Underwriters Inc., 755 F.2d 26, 29 (2d Cir. 1985)(silence concerning well-established practices and matters of general knowledge does not affect validity of marine insurance contract).

(37.) Christiania, 979 F.2d at 278. Accord Stephens v. Am. Home Assurance Co., 811 F.Supp. 937, 947 (S.D.N.Y. 1993).

(38.) Sumitomo Marine & Fire Ins. Co. v. Cologne Reins. Co. of Am., 552 N.E.2d 139, 143 (N.Y. 1990).

(39.) Compagnie de Reassurance d'Ile de France v. New England Reins. Corp., 944 F.Supp. 986, 994 (D. Mass. 1996).

(40.) Reliance Ins. Co. v, Certain Member Companies, Institute of London Underwriters, 886 F.Supp. 1147 (S.D.N.Y. 1995), aff'd, 99 F.3d 402 (2d Cir. 1995) (table). See also Collingford Australia Gen. Ins. Ltd. v. St. Paul Fire and Marine Ins. Co., 722 F. Supp. 48 (S.D.N.Y. 1979) (cedent failed to disclose premium arrangements that guaranteed profit to cedent).

(41.) Int'l Ins. Co. v. Certain Underwriters at Lloyds, London, 1991 WL 349907, at *22 (N.D. Ill. 1991) (magistrate's report and recommendation), not reported in F.Supp.; reconsid, granted in part, 1991 WL 639438 (N.D. Ill. 1991), not reported in F.Supp.

(42.) In the Matter of the Liquidation of Union Indem. Ins. Co. of New York, Michigan Nat'l Bank--Oakland v. Am. Centennial Ins. Co., 674 N.E.2d 313 (N.Y. 1996), aff'g 611 N.Y.S.2d 506 (App. Div. 1st Dep't 1994).

(43.) Compagnie, 57 F.3d 56. See also Stephens, 811 F.Supp. at 949 (reinsurer must prove cedent failed to disclose fact of which it was aware).

(44.) 979 F.2d at 279.

(45.) Id. at 280.

(46.) Owens-Illinois Inc. v. United Ins. Co., 625 A.2d 1, 32-33 (N.J.Super. 1993).

(47.) 979 F.2d at 278. See also Am. Home Assurance Co. v. Fremont Indem. Co., 745 F.Supp. 974, 976-77 (S.D.N.Y. 1980); Stephens, 811 F. Supp. at 949-50; Collingford, 722 F. Supp. at 53 n. 1.

(48.) Compagnie, 57 F.3d 56. See also CNA Reins. of London Ltd. v. Home Ins. Co., 1990 WL 3231, at *11 (S.D.N.Y. 1990), not reported in F.Supp.; Stephens, 811 F. Supp. at 946.

(49.) Glacier Gen. Assurance Co. v. Casualty Indem. Exch., 435 F.Supp. 855, 861 (D. Mont. 1977).

(50.) Curiale v. AIG Multi-Line Syndicate Inc., 613 N.Y.S.2d 360, 361 (App. Div. 1st Dep't 1994).

(51.) See, e.g., Calvert Fire Ins. Co. v. Unigard Mut. Ins. Co., 526 F.Supp. 623, 648 (D. Neb. 1980) (applying Nebraska law), aff'd, 676 F.2d 707 (8th Cir. 1982). Contra Mutuelle Generale Francaise Vie v. Life Assurance Co. of Pennsylvania, 688 F.Supp. 386, 400 (N.D. Ill. 1988) (no basis under Illinois law for reinsurer to void entire reinsurance agreement because of cedent's breach).

(52.) Calvert Fire, 526 F. Supp. at 649.

(53.) Id.

(54.) Sumitomo Marine, 552 N.E. 2d at 144.

(55.) CNA Reins. of London, 1990 WL 3231, at 9.

(56.) 89 Civ. 4415 (S.D.N.Y. April 20, 1995), reprinted in Mealey's Litig. Rep.--Reins., June 7, 1995 (applying New York law and collecting cases). See also Aetna Cas. & Surety Co. v. Columbia Casualty Co., 1996 WL 182562 (N.D. Ill. 1996). See generally RESTATMENT (SECOND) OF CONTRACTS [sections] 385 (1979).

(57.) See, e.g., Calvert Fire, 526 F.Supp. at 653-54.

IADC member Paul M. Hummer is a partner at Saul Ewing Remick & Saul in Philadelphia and a graduate of the University of California at Santa Barbara (B.A. with highest honors 1980) and Hastings College of the Law (J.D. 1984, member Hastings Law Review 1982-83). He represents insurers, reinsurers and intermediaries in litigation and regulatory proceedings.3
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Author:Hummer, Paul M.
Publication:Defense Counsel Journal
Geographic Code:1USA
Date:Jul 1, 1999
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