Part III.C
Does New York Law on Implied or Constructive Conditions
Provide a Basis for Stronghold’s Conclusion?
New York’s six-year statute of limitations for breach of contract does not begin to run until the obligee has satisfied all express conditions to the obligor’s duty to perform. (See Parts I and II.) Part III.B explained why we believe the Second Circuit in Continental Cas. Co. v. Stronghold Ins. Co. did not correctly interpret and apply New York law when it concluded that a garden-variety notice-of-loss provision in an excess-of-loss reinsurance contract was an express condition to the extent it required the cedent to notify reinsurers of paid-loss claims and demand payment. That (we believe) erroneous conclusion enabled the Second Circuit to hold that the cedent’s breach-of-contract claims were not barred by New York’s six-year statute of limitations, even though they were based on settlements the cedent had concluded with its insureds more than six-years before the cedent commenced its action. (See Part III.A.)
At the conclusion of Part III.B we raised the question whether Stronghold might make sense under the law of implied or constructive conditions, that is, if we were to interpret it as having construed the notice-of-loss provision as an implied or constructive condition. But Stronghold fails even if it is reconceptualized that way.
While the nonoccurrence of an express condition will postpone statute-of-limitations accrual, we have not researched whether the nonoccurrence of an implied or constructive condition has or even should have the same effect. As we’ll discuss in a later post, the New York Court of Appeals’ 2012 decision in Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765 (2012) suggests the answer is “no,” at least where occurrence of the condition is a matter within the obligee’s control and the obligee has the legal right to cause it to occur.
But whatever the answer to that question may be, it is academic here because there was no legitimate basis for Stronghold to have construed the notice-of-loss provision as an implied or constructive condition, even if that is what the Court intended to do. Implied or constructive conditions are imposed by law “to do justice.” What it means to “do justice” admittedly defies any reasonably precise, objective definition, but at bottom it connotes doing something for a very good—and most probably a compelling— reason. For example, Unigard I effectively held that even though “justice” warranted treating ordinary direct-insurance-contract notice provisions as implied or constructive-conditions, there was no reason to confer that same status on ordinary reinsurance-contract notice provisions. The reasons New York’s highest court gave for its conclusion were very good and probably compelling, namely that “prompt notice of the claim and expeditious processing and control of it is a matter of vital concern to the primary insurer[,]” but “of substantially less significance for a reinsurer than for a primary insurer,” principally because the interests of cedents and reinsurers in proper and businesslike claims handling are generally aligned with one another, something that increases the probability that cedents will protect their reinsurers’ claims-handling interests without active intervention by reinsurers.[1]
Assuming the point Stronghold was making (or intended to make) was that there are good, or even compelling, reasons for conferring limited implied- or constructive-condition status on reinsurance notice provisions for paid-loss purposes, the Court identified none. And from the standpoint of reinsurance law and practice, and New York’s statute-of-limitations law, there are none. If anything there are good—or even compelling— reasons why conferring implied condition status on the notice provision was unwarranted.
There was no Legitimate Reason for Stronghold to Construe the Notice-of-Loss Provision as an Implied or Constructive Condition
Before a court should imply a condition it should be satisfied that: (a) for some reason, application of general contract-law rules and principles would not adequately serve the purposes and objectives of contract law given the nature of the transaction or the circumstances surrounding it; and (b) implying a condition would better serve those purposes and objectives.[2] Contract law is generally designed to facilitate robust and efficient economic activities and markets by enabling parties to invest capital and allocate risk efficiently, enforcing transactions according to party intent and reasonable expectations of performance and encouraging market efficiency and transparency.[3] The rationale for implying a condition is that sometimes it is necessary to make an exception to the ordinary rules of contract law in circumstances where adhering to them would not adequately serve—or would frustrate— those purposes and objectives. See, generally, Unigard I, 79 N.Y.2d at 581-84; Oppenheimer, 86 N.Y.2d at 690.
The Stronghold implied claims-presentation condition purportedly requires cedents to present claims in a timely fashion before the reinsurer’s obligation to perform attaches. It is thus designed to prevent the reinsurer from suffering some injustice that the ordinary rules of contract law would not address by providing the cedent with an incentive to present its reinsurance claims timely once settled.
Stronghold, however, did not explain what injustice a reinsurer would suffer if—like any other party undertaking to indemnify another for paid loss or damage—its obligation to perform is triggered once the indemnitee pays the loss or suffers damage, unless its obligation is expressly conditioned on the indemnitee’s presentation of an indemnity claim. (See Part II.) And there is no injustice.
Cedents cannot and do not expect reinsurers to pay claims that cedents have not asked them to pay, and as a consequence, cedents have every incentive to timely present claims. Even apart from cash-flow considerations, there are several reasons why cedents have an incentive to timely present claims: (a) claim documentation or other pertinent evidence might be lost or become unavailable; (b) the reinsurer’s financial condition might deteriorate; (c) the reinsurer might cease writing business or undergo a significant change in ownership or management; (d) regulators might be alarmed if there are long delays between settlement of inward claims and outward reinsurance collections; and (e) reinsurers might challenge untimely presented claims or at least scrutinize them more than they would timely-presented claims.
Given these incentives, and given that reinsurers can under ordinary contract-law rules be relieved of liability if they can demonstrate economic prejudice resulting from untimely claims presentation, do reinsurers need any more protection against the risk of untimely-presented claims? We think the answer turns on whether the risk of prejudice from untimely claims presentation is so great that reinsurers ought to be excused from having to establish that they were actually prejudiced. See Unigard I, 79 N.Y.2d at 584 (“[W]e cannot agree with Unigard’s contention that the risk of such impairment [of the right to associate] is sufficiently grave to warrant applying a presumption of prejudice.”) (emphasis added).
Recall that in Unigard I the issue was whether New York law permitted the court to treat a reinsurance-contract garden-variety notice-of-occurrence-or-accident clause as an implied condition so that a reinsurer could argue that its obligation to pay a claim was discharged simply because notice was untimely, and without regard to whether the reinsurer suffered prejudice as a result. The Court had previously accorded implied condition status to comparable direct-insurance-contract garden-variety notice provisions in direct insurance contracts because the risk that an insurer could be prejudiced by an insured’s late notice of claim was so high that the Court had effectively determined that direct-insurance notice provisions should be construed as implied conditions if they did not otherwise qualify as express conditions, thereby providing insureds with a strong incentive to timely report losses. But in Unigard I the Court determined no such additional incentive was necessary in the reinsurance context because the risk of prejudice was not sufficiently “grave,” and in any event, was mitigated by the aligned claims-handling interests of cedents and reinsurers. The alignment of those interests tends to ensure that, even if the cedent fails to timely report a loss, the cedent will presumably protect its own claims-handling interests, and thus those of its reinsurers. See Unigard I, 79 N.Y.2d at 583.
To justify treating a notice of loss provision as implied condition for claims presentation purposes in circumstances where New York law does not permit it to be treated as an implied condition for loss-reporting purposes, Stronghold would have had to determine that the risk of reinsurer prejudice resulting from untimely claim-presentation was materially greater than the risk that a reinsurer would suffer prejudice from untimely loss reporting. But Stronghold made no such determination; it merely assumed that fact to be true without exploring whether there was any legitimate legal or factual basis for it. (See Part III.A.)
Contrary to Stronghold’s implicit suggestion, there is nothing talismanic about the period between settlement and claims presentation that would warrant treating a notice provision as a mere promise for pre-settlement-loss-reporting purposes, but as a condition for purposes of claims presentation. Provided a cedent keeps its reinsurers reasonably and timely apprised of outstanding losses, and their development over time, delays between settlement and presentation are unlikely to put the reinsurer at any meaningful increased risk of prejudice. In situations where the first notice of loss is not provided until after settlement, the risk of prejudice to the reinsurer may, of course, be higher than it would be in our first example, but the increased risk of prejudice is principally caused by the late loss-reporting, not the untimely claims presentation, and in any event, there is no reason to think that delays in claims-presentation increase the risk of prejudice to the reinsurer at a higher rate over time than do delays in loss reporting.
That does not mean reinsurers should be pleased when, as apparently occurred in Stronghold, a cedent’s first notice of loss does not occur until after the cedent has settled one or more underlying insurance claims. In Stronghold the principal source of the London Reinsurers’ dissatisfaction was, in all likelihood, not the late presentation of the settled claims, but the Cedent’s failure to notify them promptly of the claims in prior years so that they could set reserves, and, if they deemed it appropriate, share with the Cedent any comments or suggestions they might have (or not).
Given how much more important pre-settlement loss reporting is to reinsurers in comparison to timely claims presentation (see Part III.B), construing the notice-of-loss provision as an implied condition for claims-presentation purposes makes no more sense than construing it to be an express condition for claims presentation purposes. (See Part III.B.) The logic of Unigard I forecloses both conclusions.
Construing a Notice-of-Loss Provision to be an Implied or Constructive Claims-Presentation Provides no Meaningful Protection to Reinsurers from Untimely Claims Presentation and thus would not Serve the Only Purpose that Might Warrant such a Construction
Like express conditions, implied conditions determine whether, and if so,when an obligor must perform a contractual undertaking or promise. When an express condition is an act that the promisee must perform before return performance is due, strict performance of the express condition is required. But where a court construes an ordinary promise to be an implied or constructive condition, only substantial performance is required. (See Part II.) As the New York Court of Appeals, quoting Professor Williston’s treatise, has recognized “‘[w]here. . . the law itself has imposed the condition, in absence of or irrespective of the manifested intention of the parties, it can deal with its creation as it pleases, shaping the boundaries of the constructive [i.e., implied] condition in such a way as to do justice and avoid hardship.’” Oppenheimer, 86 N.Y.2d at 691 (quoting 5 Williston, Contracts § 669, at 154 (3d ed.)).
Suppose a cedent does not present a claim until three years after settlement, and then, instead of presenting its claim in the ordinary course of business, it commences a lawsuit against the reinsurer. The reinsurer would be hard-pressed to argue that the cedent did not at least substantially perform the condition by commencing the lawsuit.
Certainly the reinsurer could argue that the claims presentation (by way of service of the complaint) was not “timely” or “prompt”—as it surely would not be if the issue was whether the cedent provided timely notice of the insured’s loss prior to the settlement. But in our hypothetical, the claim would not be barred by the statute of limitations, even if we deem the settlement date to be the accrual date. Because most courts would, in the absence of clearly-expressed party intent, think it harsh to deny the cedent’s right to recover what might otherwise be valid claim, and given that the cedent’s lawsuit would unquestionably be timely asserted, we think it unlikely that a court would construe the implied condition to provide a defense to liability. We would not be surprised to see a court “distinguish” Stronghold on the ground that it involved statute of limitations accrual, not substantive liability. While the intellectual honesty of such a decision might reasonably be questioned, it would nevertheless be perceived (accurately, we think) as just in the circumstances. And the more flexible standards governing judicial creation and application of implied conditions could arguably lend support to such a conclusion—for example, to avoid “hardship” or “injustice” in the circumstances presented by the case. The problem is that the same would likely be true in practically any case where claims presentation was late, suit was brought within six-years of settlement and the reinsurer could not establish economic prejudice.
We are unaware of any cases that have construed Stronghold as deeming an ordinary notice-of-loss provision to be an implied—or for that matter, an express—condition, the non-occurrence of which would relieve a reinsurer of liability absent prejudice. We likewise doubt that most courts would seriously consider an argument that Stronghold should be so construed, even though faithful adherence to Stronghold’s logic, and New York’s law on conditions, would lead—inexorably, it seems—to that result.
The principal purpose of conditions is to determine whether an obligor is obligated to perform, not to determine when the statute of limitations accrues. Occurrence of conditions is relevant to statute-of-limitations accrual only because the statute-of-limitations law informs us that the limitation period on a breach-of-contract claim does not begin to run until the obligee has the legal right to enforce a contractual duty, that is, until the obligee has a cause of action under applicable substantive law. Implying a condition that is effectively meaningless for purposes other than for statute-of-limitations accrual purposes suggests result-oriented decision making. It might be loosely described as allowing the statute-of-limitations “tail” wag the substantive-obligation “dog.”
Construing the Notice-of-Loss Provision to be an Implied or Constructive Condition would Provide Cedents with a Perverse Incentive not to Invest Resources Designed to Facilitate Timely—and Avoid Untimely—Claims Presentation
Even if implying a timely claims-presentation condition would be at least arguably appropriate, doing so would be unwarranted because it would tend to increase the frequency of untimely claims presentation, the very ill it was ostensibly designed to cure. Recall that a legitimate reason to imply a timely claims-presentation provision would be to encourage cedents to present their claims timely and discourage untimely claims presentation. But if the implied condition would not, as a practical matter, be construed to relieve a reinsurer of liability if the cedent failed to satisfy it, then its sole effect would be to delay accrual of the limitations period.
Suppose a cedent were to settle a claim but not to bill its reinsurers until the last day before the statute of limitations would elapse were it calculated from the settlement date. If a timely-claims presentation provision is implied, then the cedent would have six-years from that date to commence an action on the claim. By contrast, if the ordinary accrual rule is applied, then the cedent’s suit would be time-barred if it were brought even one day after the claim was presented.
Not implying a timely-claims-presentation condition would provide cedents with yet another strong incentive to present its claim timely, or at least earlier than in our hypothetical. It would also likely to encourage cedents to invest more resources into facilitating timely claims presentation and avoiding untimely claims presentation, including technological and human resources and the implementation of practices and procedures designed to ensure timely presentation and prevent claims from slipping through the proverbial cracks.
As we previously discussed there are already economic incentives in place encouraging timely claims presentation, which is a good thing. It makes little sense to impose a timely claims-presentation condition that would likely increase the frequency and severity of the problem that the implied condition was ostensibly designed to address.
Even if Implied Conditions Could Legitimately be Imposed for the Sole Purpose of Delaying Statute-of-Limitations Accrual, there is Nothing “Unjust” About Requiring Cedents to Commence Suit within Six Years of the Settlement Date
Statute-of-limitations are, after all, statutes. Because of that, New York courts have been extremely reluctant to create exceptions to accrual rules, even in circumstances where the equities are or may be with the claimant. See, e.g., Ely-Cruikshank Co., Inc. v. Bank of Montreal, 81 N.Y.2d 399, 403-04 (1993) (“[W]e have noted that Statutes of Limitation are statutes of repose representing a legislative judgment that occasional hardship is outweighed by the advantage of barring stale claims. By their nature, they are somewhat harsh and seemingly unjust.”) (quotations, ellipses and citations omitted; emphasis in original). Those matters are generally left to the legislature. See, e.g., Blanco v. AT&T Co., 90 N.Y.2d 757, 772 (1997).
In the reinsurance claim context, the equities typically do not favor the ceding company. Cedents know that they have potential a reinsurance claim once they settle an insured’s claim. If they do not already know which reinsurers under which contracts may be responsible to reimburse the cedent for a portion of the settlement, they know they need to make that determination and bill their reinsurers. If a cedent does not present its reinsurance claims within six-years of settlement with the insured, then the reason is more likely than not attributable to the cedent’s own negligence, and is rarely, if ever, the fault of the reinsurer. Even if neither party is at fault, the cause is still almost always something for which the cedent would be expected to bear the risk of loss.
To be sure, insurance is an important, socially and economically valuable way of spreading risk. If insurers have to write off too many reinsurance claims than underwriting capacity will shrink, prices will rise and some insurers might even suffer financial distress.
Nevertheless, to create a rule that gives ceding companies little or no incentive to ensure that claims are presented before the expiration of the six-year statute of limitations is to invite market inefficiency. Delays in claims presentation give rise to disputes and create problems for reinsurers, who are as much a part of the market as ceding companies. A rule that delays an already generous statute of limitation tends to compound the problem by keeping the courthouse doors open to claims that were settled more than six-years before commencement of an action.
One would expect that such delays are the exception, not the rule, so whatever adverse consequences are suffered by cedents whose claims are time-barred are unlikely to cause significant problems for the insurance and reinsurance markets. It may be tempting to think that that consideration warrants giving cedents a break in those relatively rare situations, but it does not. If cedents do not have to comply with the statute of limitations rules that apply to other, similarly-situated contract-of-indemnity obligees, then the frequency of such harmful delays can be expected to increase because some of the incentives cedents would otherwise have for presenting claims timely and allocating resources to help ensure timely claims-presentation will disappear.
There is simply nothing unjust about requiring cedents to commence an action on a reinsurance claim no later than six years after settlement.
* * *
Nothing in Stronghold suggests or implies that there were any considerations of justice in play that would warrant the imposition of an implied condition for any purpose, let alone solely for delaying the commencement of the statute of limitations. Whether one views Stronghold as misapplying New York’s express condition rules or implying a condition without any legitimate justification, its holding cannot be reconciled with New York law in effect at the time it was decided.
We believe that any doubt on that score was eliminated by the New York Court of Appeals’ recent decision in Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765 (2012), and it is to that case that we shall turn in Parts IV.A and IV.B of this series.
[1] See Unigard Sec. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576, 583-84 (1992) (“Unigard I”).
Although not pertinent to our discussion, in 2008 New York abrogated by statute the direct-insurance timely-notice implied condition in the liability insurance context. Subject to a few exceptions, liability insurers must now demonstrate prejudice to defend on late notice grounds. See New York Ins. L. §§ 3420(a)(5), 3420(c)(2)(A)-(C). (Access New York’s Consolidated Laws here.)
[2] See, generally, Unigard I, 79 N.Y.2d at 581, 584 (noting that“[v]arious reasons have been expressed [by courts] for the New York exception as applied to primary insurers. . . .” but concluding that in reinsurance context “there is no sound reason to depart from the general contract law principle that a breach will excuse performance only if it is material or demonstrably prejudicial[]”); Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 690 (1995) (“Implied or constructive conditions are those ‘imposed by law to do justice’ . . . .”) (quoting Calamari and Perillo, Contracts § 11-8, at 444 [3d ed]).
[3] See, e.g., Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049 1053-54, 1066, 1069 (2d Cir. 1992) (Winter, J.) (“Unigard II”); Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902 (1987) (per curiam) (“[T]he purpose of contract law is to allocate the risks that might affect performance. . . .”); Scientific Holding Co., Ltd. v. Plessey Inc., 510 F.2d 15 (2nd Cir. 1974) (Friendly, J.) (“‘Prime objectives of contract law are to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be their rights and liabilities under the contract.’”) (quoting Restatement of Conflicts 2d § 187(1), Comment c at 565); Spartech Corp. v. Opper, 890 F.2d 949, 955 (7th Cir. 1989) (Posner, J.) (“A principal purpose of contracts and contract law is to allocate the risk of the unexpected in accordance with the parties’ respective preference for or aversion to risk and their ability or inability to prevent the risk from materializing. . . .”).
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Tags: Accrual of Statute of Limitations, Claims Presentation, Condition, Condition Precedent, Constructive Conditions, Continental Cas. Co. v. Stronghold Ins. Co., Contract of Indemnity, Delay in Claims Presentation, Demand for Payment, Due and Payable Rule, Ely-Cruikshank Co. Inc. v. Bank of Montreal, Express Condition, Hahn Automotive Warehouse v. American Zurich Ins. Co., Implied Conditions, IRMI Glossary, Late Notice, Loss Reporting, New York Court of Appeals Unigard, Notice Clause, Notice of Loss, Notice Provision, Oppenheimer & Co. v. Oppenheim, Purpose of Notice of Loss Provision, Second Circuit Unigard, Statute of Limitations, Time Bar, Timely Notice, Timely Presentation, Unigard Sec. Ins. Co. v. North River Ins. Co., United States Court of Appeals for the Second Circuit, Untimely Claims Presentation
