Sumitomo Marine & Fire Insurance Co. v. Cologne Reinsurance Co., 75 N.Y.2d 295 (1990)
A reinsurer can waive its right to rescind a reinsurance agreement based on the reinsured’s failure to disclose a material fact if the reinsurer continues to treat the agreement as valid after learning of the undisclosed fact.
Summary
Sumitomo, an insurer, sought reinsurance from Cologne Reinsurance and Buffalo Reinsurance for a policy covering Auburn Steel. The original policy covered “sudden and accidental radioactive contamination.” After a loss occurred due to radioactive contamination, the reinsurers refused to pay, arguing that Sumitomo failed to disclose the radioactive contamination coverage, a material risk. The New York Court of Appeals held that even if Sumitomo had a duty to disclose, the reinsurers waived their right to rescind because they continued to treat the agreement as valid after learning of the coverage.
Facts
Sumitomo insured Auburn Steel, a steel mill, under an “all-risks” policy that included coverage for “sudden and accidental radioactive contamination.” Sumitomo then sought reinsurance from several companies, including Cologne Reinsurance and Buffalo Reinsurance, via a telex that did not explicitly mention the radioactive contamination coverage. After Auburn Steel suffered a loss due to radioactive contamination, Sumitomo sought payment from the reinsurers. The reinsurers initially refused payment based on a nuclear incident exclusion clause. Later, they argued that Sumitomo’s failure to disclose the radioactive contamination coverage entitled them to rescission of the reinsurance agreement.
Procedural History
The trial court granted summary judgment to the reinsurers. The Appellate Division reversed, holding that the reinsurers were obligated to determine the actual scope of coverage before issuing their formal certificates of reinsurance. The Court of Appeals affirmed the Appellate Division’s order, but on different grounds, focusing on waiver.
Issue(s)
Whether a reinsurer can rescind a reinsurance agreement based on the reinsured’s failure to disclose a material fact (the radioactive contamination coverage) if the reinsurer continues to treat the agreement as valid after learning of the undisclosed fact.
Holding
No, because the reinsurers waived their right to rescind by continuing to treat the agreement as valid after they were fully aware of the radioactive contamination coverage.
Court’s Reasoning
The court acknowledged the general principle that a reinsured must disclose all material facts concerning the original risk to potential reinsurers. Failure to do so entitles the reinsurer to rescission. However, the court emphasized that this right to rescission can be waived. The court found that the reinsurers were aware of the loss and the radioactive contamination coverage (Amendment No. 3) before signing the cover note and issuing their certificates of reinsurance. Despite this knowledge, they did not seek to void the agreement but treated it as valid for a considerable time. The court reasoned that while issuing the formal certificate might be considered “ministerial,” the reinsurers’ continued validation of the agreement, even after denying payment and answering the complaint, constituted a waiver of their right to rescind. The court quoted: “defendants failed to take steps to assert their alleged right to rescission within a reasonable time… but also affirmatively treated the agreement as a valid one well beyond the point where they had the most complete possible notice of the coverage undertaken by Sumitomo.” Therefore, even if the radioactive contamination coverage was considered an unusual or extended coverage that should have been disclosed, the reinsurers’ actions precluded them from later claiming rescission. The court explicitly avoided deciding the broader issue of disclosure when the reinsurer’s independent limitations on its exposure coincide with the reinsured’s allegedly unusual liability.