Part III.A
Continental Casualty Co. v. Stronghold Ins. Co.: Background
In Part II (here) we reviewed New York law pertinent to express conditions and how they can delay the accrual of the statute of limitations if the plaintiff has not satisfied them.
Now let’s turn to the U.S. Court of Appeals for the Second Circuit’s decision in Continental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996), a case that features a fairly comprehensive recitation of New York’s reinsurance-related statute-of-limitations accrual rules as they existed in 1996, but did not apply New York’s express-condition rules consistently with controlling, New York Court of Appeals authority. This Part III.A summarizes what transpired in Stronghold and Part III.B will explain why we think the case not correctly decided.
The Stronghold Facts
Stronghold was a dispute between a United States cedent (the “Cedent”) and its London-Market reinsurers (the “London Reinsurers”) that arose under certain excess-of-loss treaties reinsuring medical malpractice liability policies the Cedent had issued to its hospital insureds.
In the 1980s the Cedent settled several medical malpractice liability claims on behalf of its insureds, but did not notify London Reinsurers of the underlying losses that resulted in the settlements, or present their reinsurance claims to the London Reinsurers, until sometime after the underlying claims were settled. The record apparently did not specify the date or dates on which the Cedent first notified the London Reinsurers of the settlements and demanded payment from the London Reinsurers.
The excess-of-loss treaties (the “Reinsurance Contracts”) provided that the London Reinsurers were “liable only for the excess of loss” incurred by the Cedent in excess of specified retentions of “ultimate net loss.” The contracts defined “ultimate net loss,” as “the sums actually paid in cash in settlement of losses [for] which [the Cedent] is liable.” They also featured notice of loss provisions that said “Loss, if any, under” a policy is “to be reported to [the London Reinsurers] as soon as practicable.”
The London Reinsurers denied each of the reinsurance claims during the period 1987-1990, and in 1991 the Cedent commenced an action for breach of contract in the United States District Court for the Southern District of New York. The London Reinsurers defended on late notice and statute-of-limitations grounds.
As respects the date on which the statute of limitations began to run on each reinsurance claim, the London Reinsurers argued that each claim accrued when the Cedent settled the claim with its insured. Each claim was settled more than six years before the Cedent commenced its action. According to the London Reinsurers, the Cedent was entitled to indemnity immediately upon payment of each settlement, even thought it did not demand payment from the London Reinsurers until a much later date. Alternatively, the London Reinsurers argued that even if their indemnity obligation was conditioned on the Cedent’s presentation of a reinsurance claim for payment, each of the Cedent’s individual breach of contract of contract claims accrued on the date it became entitled to demand payment from the London Reinsurers, and that occurred each time the Cedent settled an underlying claim.
The Cedent argued that the claims accrued when the London Reinsurers allegedly breached the reinsurance contracts by refusing to pay the claims. Since the London Reinsurers did not refuse to pay the claims any earlier than 1987, and the Cedent commenced its lawsuit in 1991, the lawsuit would not be barred by the statute of limitation under the Cedent’s date-of-accrual theory.
Back in 1991, as some readers may recall, the New York Court of Appeals had not yet decided whether a reinsurer could successfully defend on late notice grounds without establishing prejudice. But in 1992, the London Reinsurers’ litigation strategy was dealt a painful blow when the New York Court of Appeals held, in Unigard Sec. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576 (1992), that unless a late notice provision expressly conditions a reinsurer’s liability for the claim on timely notice—i.e., the late notice provision is an express condition, not simply a promise—a reinsurer must establish prejudice to be relieved of liability based on the cedent’s failure to provide timely notice of a claim or occurrence.
Answering a question certified to it by the United States Court of Appeals for the Second Circuit, New York’s highest Court explained that, to be express conditions, contractual provisions must unambiguously evidence the parties’ intent to make performance of a duty conditional.[1] The New York Court of Appeals also held that the notice provision before it—which required “[p]rompt notice . . . of any occurrence or accident which appears likely to involve this reinsurance’”—was not an express condition, and that accordingly, the reinsurer in that case could not be relieved of liability for the cedent’s late notice of the loss or losses sustained and reported by the insureds, unless the reinsurer could prove it suffered prejudice as a result of the late notice.
Not too long after the New York Court of Appeals’ landmark reinsurance-law decision answering the Second Circuit’s certified question, the Second Circuit issued its own landmark decision in the Unigard case, holding, among other things, that the reinsurers were unable to establish either prejudice—i.e., “economic injury”—resulting from late notice or that the cedent acted in bad faith in failing to provide timely notice (which would have relieved the reinsurer from liability even without a showing of prejudice).[2]
The London Reinsurers apparently concluded that they could not establish the requisite prejudice to prevail on their late notice defense, a decision which apparently prompted the parties to enter into a stipulation designed to facilitate summary judgment on the merits in favor of one party or the other on the statute of limitations issue. To that end the London Reinsurers agreed to waive their late notice and all other defenses other than statute of limitations, and stipulated with the Cedent that: (a) New York law governed; (b) New York’s six-year statute of limitations applied; (c) the Cedent satisfied all conditions of the Reinsurance Contracts; (d) the Cedent had settled its claims with its insureds more than six years prior to commencing the action; and (e) the Cedent had commenced the action within six-years of the London Reinsurers’ earliest denial of any of the claims.
The parties cross-moved for summary judgment, and the district court ruled in favor of the Cedent, holding that no breach of the Reinsurance Contracts occurred until the London Reinsurers refused to pay the Cedent’s claims. The district court granted summary judgment in favor of the Cedent, holding that the Cedent’s causes of action did not accrue until the London Reinsurers denied the Cedent’s claims.
The London Reinsurers appealed to the United States Court of Appeals for the Second Circuit, which affirmed the district court’s judgment. Continue Reading »