Reinsurer Must Prove Prejudice to Avoid Coverage Based on Late Notice

Pacific Employers Ins. Co. v. Global Reins. Corp. of Am. (E.D. Pa. May 23, 2011)

In a matter of first impression in Pennsylvania, a federal court in Pennsylvania held that a reinsurer must demonstrate prejudice in order to avoid its coverage obligation based on the cedant’s failure to comply with the reinsurance certificate’s notice provisions. In so holding, the court noted that Pennsylvania law does not favor forfeiture of coverage for a technical breach of the insurance contract, a maxim that also applies in the reinsurance context.

Pacific Employers entered into a facultative reinsurance contract with Global through which Global, as the reinsurer, agreed to reinsure an umbrella commercial liability policy issued by Pacific Employers to Buffalo Forge Company. After the certificate was executed, Buffalo Forge was named in numerous asbestos personal injury lawsuits. Buffalo Forge began to notify Pacific Employers of the personal injury claims and lawsuits in April 2001. Pacific Employers did not notify Global of the claims until September 2009, allegedly when Global’s layer of reinsurance was first implicated. Global denied coverage based on Pacific Employers’ failure to comply with the certificate’s notice provision.

Global moved for summary judgment on the ground that Pacific Employers did not promptly provide a Definitive Statement of Loss (“DSOL”), which Global claimed was a condition precedent to coverage. Pacific Employers opposed the motion, arguing that the policy provision requiring a DSOL referred to Global’s obligation to remit payment, not its obligation to provide coverage. Pacific Employers also argued that the provision was ambiguous and, therefore, that the court should consider Pacific Employers’ extrinsic evidence, including evidence of trade usage and custom as well as expert and lay testimony.

The court found the policy provision that required notice pertained to Global’s obligation to provide coverage, not its obligation to remit payment. The court also held that Pacific Employers’ eight-year delay in providing a DSOL with respect to the asbestos claims breached the provision, which required prompt notice of a DSOL of any claim where Pacific Employers created a loss reserve equal to 50% of its loss retention.

The court was then asked to decide whether New York law or Pennsylvania law applied. The court found that Pennsylvania law applied and, in a matter of first impression, ruled that the Pennsylvania Supreme Court would hold that a reinsurer must prove prejudice to avoid coverage where the cedant breached a notice condition that is a condition precedent to coverage. Inasmuch as Global had earlier represented to the court that it intended to withdraw its prejudice argument, the court ruled that Global was not entitled to summary judgment.

For a copy of the decision, click here

Carrie Appler and Jeffrey Kingsley

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