New York Law Review

Tag: Reinsurance

  • Global Reinsurance Corp. v. Equitas Ltd., 17 N.Y.3d 724 (2011): Extraterritorial Reach of State Antitrust Law

    Global Reinsurance Corp. v. Equitas Ltd., 17 N.Y.3d 724 (2011)

    A state’s antitrust law does not extend to a foreign conspiracy that primarily affects a foreign marketplace, even if a domestic company experiences injury as a result, unless there is a close nexus between the conspiracy and injury to competition within the state.

    Summary

    Global Reinsurance, a New York branch of a German corporation, sued Equitas, London-based retrocessionary reinsurers, alleging a violation of New York’s Donnelly Act. Global claimed Equitas’s coordinated claims-handling practices restrained trade in the global retrocessional reinsurance market. The New York Court of Appeals reversed the Appellate Division’s reinstatement of the claim, holding that the Donnelly Act does not extend to a foreign conspiracy primarily affecting a foreign marketplace, even if a New York entity suffers economic injury. The court emphasized that the alleged anticompetitive conduct lacked a sufficient nexus to competition within New York State.

    Facts

    Lloyd’s of London syndicates, facing mounting liabilities from non-life retrocessional coverage (environmental, catastrophic, asbestos-related risks), proved unable to effectively manage claims due to competitive pressures. To address this crisis, Lloyd’s created the Reconstruction and Renewal Plan (R&R plan), leading to the formation of Equitas in 1996. Equitas was designed to reinsure the non-life retrocessionary obligations of the Lloyd’s syndicates. Plaintiff Global Reinsurance, purchased coverage for some of its non-life risks from Lloyd’s retrocessionaires. Global alleged that Equitas adopted aggressive claims management practices, harming Global. Global asserted that this centralized, “hard-nosed” approach suppressed competition in claims management, a crucial component of retrocessional coverage.

    Procedural History

    Global Reinsurance initially filed suit asserting a Donnelly Act claim and a claim for tortious interference. The tortious interference claim was dismissed. Global amended its complaint to allege a global market for retrocessional non-life insurance. Supreme Court dismissed the Donnelly Act claim. The Appellate Division reversed, reinstating the Donnelly Act claim. Equitas appealed, and the New York Court of Appeals reversed the Appellate Division’s order and reinstated the Supreme Court’s judgment dismissing the complaint.

    Issue(s)

    1. Whether the complaint sufficiently alleges that Equitas possessed market power in the relevant worldwide market to produce a market-wide anticompetitive effect.
    2. Whether the Donnelly Act can be understood to extend to the foreign conspiracy plaintiff purports to describe, given that the conspiracy occurred in London and primarily affected a London marketplace.

    Holding

    1. No, because the complaint does not allege that Lloyd’s could generally engage in “run-off” type claims management behavior and retain its business in a global market.
    2. No, because the injury inflicted, attributable primarily to foreign, government-approved transactions having no particular New York orientation, is not redressable under New York State’s antitrust statute.

    Court’s Reasoning

    The Court of Appeals found that although a worldwide market was alleged, there was no sufficient allegation of anticompetitive effect attributable to the alleged conspiracy beyond the Lloyd’s marketplace. The court stated that “[o]rdinarily, a Donnelly or Sherman Act plaintiff… must minimally allege that conspirators possessed power within the relevant market to produce a market-wide anticompetitive effect.” The court determined there were no allegations from which it was possible to conclude that the Lloyd’s syndicates were capable of avoiding the business consequences of the claims-management approach in the global market.
    Even if this pleading deficiency could be cured, the court found that the Donnelly Act cannot be understood to extend to the foreign conspiracy plaintiff purports to describe. The complaint alleges that a German reinsurer, through its New York branch, purchased retrocessional coverage in a London marketplace and consequently sustained economic injury when retrocessional claims management services were, by agreement within that London marketplace, consolidated so as to eliminate competition over their delivery.
    The court reasoned that even assuming the extraterritorial reach of the Donnelly Act is as extensive as that of the Sherman Act, the Sherman Act would not reach a competitive restraint, imposed by participants in a British marketplace, that only incidentally affected commerce in this country. Quoting the Foreign Trade Antitrust Improvements Act (FTAIA), the court noted that the Sherman Act generally “shall not apply to conduct involving [non-import] trade or commerce . . . with foreign nations.” The court concluded that even if the Sherman Act could reach the purported conspiracy, it would not follow that the Donnelly Act should be viewed as coextensive because for a Donnelly Act claim to reach a purely extraterritorial conspiracy, there would have to be a very close nexus between the conspiracy and injury to competition in this state. The court ultimately determined there was no such nexus based on the pleadings before it.

  • Factory Mutual Ins. Co. v. Excess Ins. Co., 1 N.Y.3d 577 (2004): Reinsurance Policy Limits Cap Loss Adjustment Expenses

    Factory Mutual Ins. Co. v. Excess Ins. Co., 1 N.Y.3d 577 (2004)

    A “follow the settlements” clause in a reinsurance agreement does not obligate the reinsurer to pay loss adjustment expenses exceeding the policy’s stated indemnification limit.

    Summary

    Factory Mutual, an insurer, sought reinsurance from London reinsurers for a policy issued to Bull Data covering property in France. After a fire, Factory Mutual settled with Bull Data for nearly $100 million and incurred substantial litigation expenses. When the reinsurers refused to pay loss adjustment expenses beyond the $7 million policy limit, Factory Mutual sued. The New York Court of Appeals held that the “follow the settlements” clause did not require the reinsurers to pay loss adjustment expenses exceeding the $7 million limit. The court reasoned that allowing such payments would nullify the negotiated liability cap and subject reinsurers to limitless liability. This ruling affirms that reinsurance policy limits are intended to cap total risk exposure, including loss adjustment expenses.

    Facts

    Factory Mutual insured Bull Data against property loss with a $48 million limit. Factory Mutual then obtained facultative reinsurance from London reinsurers, capped at $7 million. The reinsurance policy included a “follow the settlements” clause. A fire destroyed Bull Data’s warehouse, leading to a claim. Factory Mutual initially refused to pay, suspecting arson. Bull Data sued in France, and Factory Mutual unsuccessfully sued Bull Data in the U.S. Factory Mutual eventually settled with Bull Data for nearly $100 million and incurred around $35 million in legal expenses.

    Procedural History

    Factory Mutual sought payment from the reinsurers, who refused and initiated an action in England challenging the reinsurance contract’s validity; this action was dismissed. Factory Mutual then filed declaratory judgment actions in U.S. District Courts, eventually leading to a dismissal and vacatur due to jurisdictional issues. The reinsurers then sued Factory Mutual in New York State Supreme Court seeking to annul the reinsurance agreement, or in the alternative, damages. Factory Mutual counterclaimed for the $7 million policy limit plus $5 million in loss adjustment expenses. The Supreme Court ruled the reinsurers’ obligation for expenses was not subject to the $7 million limit. The Appellate Division reversed, holding the limit applied. The New York Court of Appeals affirmed the Appellate Division.

    Issue(s)

    Whether a “follow the settlements” clause in a reinsurance policy subjects the reinsurer’s obligation to pay loss adjustment expenses to the policy’s stated indemnification limit.

    Holding

    No, because requiring reinsurers to pay loss adjustment expenses exceeding the negotiated policy limit would render the limit meaningless and expose reinsurers to potentially limitless liability.

    Court’s Reasoning

    The court emphasized that the intent of the parties controls the interpretation of reinsurance agreements. The court found that the $7 million limit applied to all obligations, including loss adjustment expenses. The “follow the settlements” clause, located in the “Conditions” section of the policy, did not override the policy limit. The court adopted the reasoning of Bellefonte Reins. Co. v Aetna Cas. & Sur. Co., 903 F.2d 910 (2d Cir. 1990) and Unigard Sec. Ins. Co., Inc. v North Riv. Ins. Co., 4 F.3d 1049 (1993), which held that similar “follow the fortunes” clauses do not eliminate the liability cap in reinsurance policies. The court stated, “to allow[ ] the ‘follow the fortunes’ clause to override the limitation on liability—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.” The court rejected Factory Mutual’s argument that property insurance differs from liability insurance in this context, stating, “Whether [the reinsurers] reimburse [Factory Mutual] for claims for property losses or defense costs makes no difference to them…[T]he limit clauses define the reinsurers’ bargained-for maximum exposure to liability inclusive of all costs and expenses.” Factory Mutual could have negotiated a separate limit for loss adjustment expenses but did not. The court also noted that the “follow the settlements” clause gave the reinsurers no control over Factory Mutual’s litigation strategy or expenses, further justifying limiting their liability to the policy cap.

  • Travelers Cas. and Sur. Co. v. Certain Underwriters at Lloyd’s of London, 96 N.Y.2d 583 (2001): Aggregation of Environmental Claims Under Reinsurance Treaties

    Travelers Cas. and Sur. Co. v. Certain Underwriters at Lloyd’s of London, 96 N.Y.2d 583 (2001)

    A “follow the fortunes” clause in a reinsurance treaty does not override the treaty’s specific language defining what constitutes a covered loss; a reinsurer is not bound to indemnify a reinsured’s allocation of losses if the allocation is inconsistent with the treaty’s definition of “disaster and/or casualty”.

    Summary

    Travelers, an insurance company, sought reinsurance coverage for environmental injury claims from Koppers and DuPont. Travelers had issued liability policies to these companies and subsequently faced claims related to pollution at numerous sites. Travelers argued that these claims arose from a “common origin” (deficient corporate environmental policies) and thus could be aggregated as a single “disaster and/or casualty” under its reinsurance treaties. The New York Court of Appeals held that the aggregation of these losses was beyond the scope of the reinsurance treaties, as the sites lacked a spatial or temporal connection, and the “follow the fortunes” clause did not supersede the specific definition of covered losses in the treaty.

    Facts

    Travelers issued primary, excess, and umbrella liability policies to Koppers (1960-1981) and DuPont (1967-1985). Koppers faced environmental actions at over 150 sites nationwide, and DuPont faced similar claims. Travelers settled with Koppers for $140 million and with DuPont for $72.5 million, allocating portions to specific policies. For reinsurance purposes, Travelers treated the entire Koppers and DuPont settlements each as a single “disaster and/or casualty,” claiming a “common origin” in the companies’ environmental policies. The reinsurance treaties covered “each and every loss” arising out of “any one disaster and/or casualty.”

    Procedural History

    Travelers sued its reinsurers after they disputed the single allocation of losses. The Supreme Court dismissed Travelers’ complaints, holding that the allocations did not fall within the reinsurance treaties’ terms. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and affirmed the lower courts’ decisions.

    Issue(s)

    1. Whether Travelers’ single allocations of the Koppers and DuPont settlements were encompassed by the term “disaster and/or casualty” in the reinsurance treaties, given the lack of spatial or temporal relationship between the contaminated sites.
    2. Whether the “follow the fortunes” clauses in the reinsurance treaties mandated that the Reinsurers reimburse Travelers for losses it allocated to them reasonably and in good faith, even if the allocation was technically outside the terms of the treaties.

    Holding

    1. No, because the reinsurance treaties defined “disaster and/or casualty” as “all loss resulting from a series of accidents, occurrences and/or causative incidents having a common origin,” implying a spatial or temporal relationship between the incidents, which was lacking in this case.
    2. No, because a “follow the fortunes” clause does not override the express terms of the reinsurance agreement; it cannot expand coverage beyond what the treaty specifically defines as a covered loss.

    Court’s Reasoning

    The Court reasoned that the term “disaster and/or casualty” required a spatial or temporal connection between the incidents to be aggregated as a single loss, based on the phrase “series of” accidents. The court rejected Travelers’ argument for a broad interpretation of “common origin,” stating that it would effectively excise the words “series of” from the treaty. The Court emphasized that a spatial or temporal relationship was lacking because the contaminated sites were geographically diverse and the pollution occurred over decades involving different manufacturing processes and pollutants. The court emphasized that in interpreting reinsurance policies, meaning must be given to every sentence, clause, and word of the contract. Regarding the “follow the fortunes” clause, the Court relied on Bellefonte Reins. Co. v. Aetna Cas. & Sur. Co., holding that such a clause cannot override the limitation on liability or other specific conditions in the reinsurance agreement. The Court distinguished cases cited by Travelers, noting that those cases involved challenges to settlement decisions based on the underlying policies, while this case involved a challenge to Travelers’ allocation of settlements based on the contractual language of the reinsurance treaties. The Court found that the “follow the fortunes” clause requires the reinsurer to abide by the cedent’s (Travelers’) good faith liability determinations, but only to the extent that such determinations fall within the explicit parameters of the reinsurance contract. A direct quote from the case states: “Following the fortunes means that, so long as the reinsured acts in good faith, its losses from underwriting that looks improvident in retrospect or was simply unlucky will be indemnified within the terms of the reinsurance contract.”

  • Michigan National Bank-Oakland v. American Centennial Ins. Co., 89 N.Y.2d 100 (1996): Duty to Disclose Insolvency in Reinsurance Agreements

    Michigan National Bank-Oakland v. American Centennial Ins. Co., 89 N.Y.2d 100 (1996)

    An insurance company’s insolvency is a material fact that must be disclosed to a potential reinsurer, and failure to do so allows the reinsurer to void the reinsurance agreement, even against a liquidator or surety bond beneficiary.

    Summary

    Michigan National Bank sought to recover on a surety bond issued by Union Indemnity Insurance Company. Reinsurers of Union Indemnity sought to rescind their reinsurance agreements, alleging fraud due to Union Indemnity’s failure to disclose its insolvency. The New York Court of Appeals held that Union Indemnity’s insolvency was a material fact that should have been disclosed and that the reinsurers were entitled to rescission, even against the liquidator of Union Indemnity and the beneficiary of the surety bond. The Court also addressed the admissibility of informal judicial admissions made by the liquidator’s counsel in a related action.

    Facts

    Union Indemnity Insurance Company was placed into liquidation due to insolvency. Michigan National Bank-Oakland was the beneficiary of a surety bond issued by Union Indemnity. Michigan National Bank brought an action against Union Indemnity’s reinsurers to recover on the bond. The Liquidator intervened, claiming the reinsurance proceeds as assets of Union Indemnity. The reinsurers counterclaimed, alleging fraud based on Union Indemnity’s failure to disclose its insolvency.

    Procedural History

    The reinsurers moved for summary judgment, seeking rescission of the reinsurance agreements based on Union’s failure to disclose its insolvency. The Supreme Court granted the motion, finding that affidavits from the Liquidator’s counsel in a related action (Corcoran v. Hall & Co.) constituted informal judicial admissions of Union’s fraud. The Appellate Division affirmed. Leave to appeal was initially dismissed on nonfinality grounds. After severance of claims, the Appellate Division affirmed the dismissal of the Liquidator’s claim for reinsurance proceeds, and the Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether statements made by a State Liquidator’s outside counsel in a sworn affidavit in a related action constitute informal judicial admissions.

    2. Whether the failure of an insolvent insurer to disclose its insolvency to a reinsurer constitutes fraud in the inducement.

    3. Whether such an omission constitutes a valid defense to claims for enforcement of the reinsurance contracts brought by the Liquidator and the beneficiary of a surety bond, thus justifying rescission of the reinsurance contracts.

    Holding

    1. Yes, because the statements made by the Liquidator’s counsel, with supporting documentation, constituted informal judicial admissions.

    2. Yes, because an insurance company’s insolvency is a material fact that must be disclosed to a potential reinsurer.

    3. Yes, because the failure to disclose insolvency supports voiding the reinsurance treaties against both the Liquidator and the surety bond beneficiary.

    Court’s Reasoning

    The Court held that the affidavits submitted by the Liquidator’s counsel in the Hall action were admissible as informal judicial admissions because they documented material omissions and misrepresentations regarding Union’s financial condition. The court stated that it would be “unseemly” to allow the Liquidator to contradict its prior assertions. As such, the court found that the reinsurers established a defense of fraud, voiding the reinsurance treaties ab initio.

    The Court emphasized that reinsurance contracts are governed by the principle of uberrimae fidei (utmost good faith), requiring disclosure of all material facts regarding the original risk. The Court reasoned that insolvency is a material fact because it is likely to influence underwriters’ decisions, as it potentially increases the risk assumed by the reinsurer. Quoting Sumitomo Mar. & Fire Ins. Co. v Cologne Reins. Co., 75 N.Y.2d 295, 303, the Court reiterated that “[a] reinsured is obliged to disclose to potential reinsurers all ‘material facts’ concerning the original risk, and failure to do so generally entitles the reinsurer to rescission of its contract”.

    The Court rejected the Liquidator’s argument that New York’s insurance liquidation scheme precludes the defense of fraud, citing Matter of Midland Ins. Co., 79 N.Y.2d 253, for the proposition that “liquidation cannot place the liquidator in a better position than the insolvent company he takes over.” Since Union Indemnity could not enforce the reinsurance agreements if it had committed fraud, the Liquidator was similarly barred.

    Finally, the Court held that the reinsurers’ defense of fraud was properly asserted against Michigan National Bank, as the beneficiary of the surety bond. Because the reinsurance treaties were void ab initio due to Union Indemnity’s fraud, Michigan, as an insured, stood in no better position than its defunct insurer.

  • Unigard Sec. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576 (1992): Reinsurer Must Demonstrate Prejudice for Late Notice Defense

    Unigard Sec. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576 (1992)

    A reinsurer, unlike a primary insurer, must demonstrate actual prejudice resulting from a ceding insurer’s late notice of a potential claim to successfully invoke a late notice defense; the primary insurer’s “no prejudice” rule does not apply in reinsurance contracts.

    Summary

    Unigard Security Insurance Company (Unigard) sought a declaratory judgment against North River Insurance Company (North River), arguing that North River’s late notice of a potential claim relieved Unigard of its obligations under a facultative reinsurance certificate. The certificate covered a high-layer excess insurance policy issued by North River to Owens-Corning Fiberglass Corp. The New York Court of Appeals held that, unlike primary insurers, reinsurers must prove prejudice to successfully assert a late notice defense. The court reasoned that the relationship between reinsurer and ceding insurer differs significantly from that of primary insurer and insured, warranting different treatment regarding notice requirements.

    Facts

    North River issued a $30 million excess liability insurance policy to Owens-Corning. Unigard provided facultative reinsurance to North River for this policy. The reinsurance certificate required North River to give prompt notice of occurrences likely to involve the reinsurance. In April 1987, North River became aware that its excess policies were being penetrated due to asbestos claims. North River sent a precautionary notice to Unigard in August 1987, which Unigard received on September 2, 1987. Unigard argued that this notice was untimely and sought to avoid its reinsurance obligations.

    Procedural History

    Unigard sued North River in the United States District Court for the Southern District of New York, seeking a declaratory judgment that it was not obligated to pay under the reinsurance certificate due to late notice. The District Court ruled in favor of North River, holding that Unigard had to demonstrate prejudice, which it failed to do. The Second Circuit Court of Appeals certified the question of whether a reinsurer must prove prejudice for a late notice defense to the New York Court of Appeals.

    Issue(s)

    Whether a reinsurer must prove prejudice before it can successfully invoke the defense of late notice of loss by the reinsured.

    Holding

    Yes, a reinsurer must prove prejudice because critical distinctions exist between primary insurance and reinsurance, making the primary insurer’s “no prejudice” rule inapplicable to reinsurance contracts.

    Court’s Reasoning

    The court distinguished primary insurance from reinsurance, noting that reinsurance is a contract between two insurance companies where the reinsured cedes part of its risk to the reinsurer for a percentage of the premium. The reinsurer’s only obligation is to indemnify the primary insurer; it has no direct obligations to the insured. Unlike primary insurers, reinsurers are not responsible for providing a defense, investigating claims, or controlling settlements, which are the sole responsibility of the primary insurer. Because settlements made by the primary insurer are binding on the reinsurer due to “follow the fortunes” clauses, the failure to give prompt notice is less significant for a reinsurer than for a primary insurer. The court stated, “All claims covered by this reinsurance when settled by the Company shall be binding on the Reinsurers, who shall be bound to pay their proportion of such settlements“. While a reinsurer has a “right to associate” with the ceding company in the defense of a claim, the court found that the risk of impairment of that right due to late notice did not warrant a presumption of prejudice. The court also emphasized that a contractual duty ordinarily will not be construed as a condition precedent absent clear language showing that the parties intended to make it a condition. Because there was nothing in the prompt notice provision of the reinsurance certificate indicating that the parties intended the giving of notice to operate as a condition precedent, the court applied the general contract law principle that a breach will excuse performance only if it is material or demonstrably prejudicial. Therefore, a reinsurer must demonstrate how it was prejudiced by the late notice and cannot rely on the presumption of prejudice applicable to primary insurers.

  • Kemper Reinsurance Co. v. Corcoran, 79 N.Y.2d 253 (1992): Reinsurer’s Right to Offset Debts in Insolvency

    Kemper Reinsurance Co. v. Corcoran, 79 N.Y.2d 253 (1992)

    A reinsurer may offset amounts owed to it by an insolvent insurer under one contract against amounts it owes the insolvent insurer under a separate, unrelated contract, provided the debts are mutual and arise from contract.

    Summary

    Kemper Reinsurance Company sought a declaration that it could offset money it owed Midland Insurance Company (in liquidation) under a reinsurance contract against amounts Midland owed it for premiums under a separate contract. The New York Court of Appeals held that Insurance Law § 7427 authorized such an offset because the debts were mutual, even though they arose from different transactions. The Court reasoned that New York law and policy favored allowing such offsets to provide security to insurers and prevent precipitous failures.

    Facts

    Midland and its affiliates entered a reinsurance treaty with Kemper Re in 1979. In 1984, Midland issued an excess products liability policy to Esmark, Inc./International Playtex, Inc., and obtained a facultative contract with Kemper Re, reinsuring 75% of the risk. The Playtex contract included an insolvency clause obligating Kemper Re to pay reinsurance proceeds regardless of Midland’s insolvency.

    Procedural History

    In 1986, Midland was placed into liquidation. Kemper Re owed Midland approximately $750,000 in reinsurance proceeds under the Playtex contract, while Midland owed Kemper Re a similar amount in unpaid premiums under the treaty. Kemper Re sought to offset the debts, but the Superintendent of Insurance, as liquidator, objected. Kemper Re sued for a declaration permitting the offset. The Supreme Court denied Kemper Re’s motion for summary judgment, but the Appellate Division reversed, granting Kemper Re the right to set off the debts.

    Issue(s)

    1. Whether debts and credits must arise from the same contractual transaction to be considered “mutual” under Insurance Law § 7427, allowing them to be offset against one another in liquidation proceedings.

    2. Whether the insolvency clause in the Playtex contract, requiring payment “without diminution because of such insolvency,” bars Kemper Re from exercising its right of offset.

    3. Whether the debts were between the same parties and in the same capacity, considering that Midland’s affiliates had the right to cede risks under the treaty.

    Holding

    1. No, because the legislative history of Insurance Law § 7427, patterned after bankruptcy law, suggests that mutual debts need not arise from the same transaction.

    2. No, because the insolvency clause was intended to overcome the common-law rule that a reinsurer only had to reimburse the liquidator for losses actually paid by the ceding company, not to destroy a reinsurer’s right of offset under Insurance Law § 7427.

    3. Yes, because Midland was the only company that ceded risks under the treaty, and the liquidator stands in the shoes of the insolvent company.

    Court’s Reasoning

    The Court of Appeals reasoned that the term “mutual debts” under Insurance Law § 7427 requires that debts be “due to and from the same person in the same capacity.” However, the statute does not explicitly require the debts to arise from the same transaction. Referencing legislative history, the court noted the statute was modeled after bankruptcy laws, which allow offsets arising from different transactions. The Court distinguished prior New York cases cited by the Superintendent, finding them either involving fraud or situations where the parties were acting in different capacities (e.g., trustee vs. contractual debtor). The Court also emphasized that public policy favored allowing offsets as a form of security for insurers, particularly smaller ones. Quoting Scott v. Armstrong, the court stated that “only the balance, if any, after the set-off is deducted which can justly be held to form part of the assets of the insolvent.” As for the insolvency clause, the Court determined its purpose was to ensure the reinsurer paid the liquidator even if the insolvent insurer had not yet paid policyholders, and it was not intended to eliminate the right of offset. Finally, the Court found that the debts were indeed between the same parties and in the same capacity, because Midland was the only company that ceded risks under the treaty, and the liquidator’s rights are no greater than those of the insolvent company. The Court also noted that liquidation cannot place the liquidator in a better position than the insolvent company he takes over, authorizing him to demand that which the company would not have been entitled to prior to liquidation (see, Bohlinger v Zanger, 306 NY 228, 234).

  • Sumitomo Marine & Fire Ins. v. Cologne Reinsurance, 75 N.Y.2d 295 (1990): Duty to Disclose Material Facts in Reinsurance Agreements

    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.