693 F.3d 417 (3rd Cir. 2012), 11-3234, Pacific Employers Ins. Co. v. Global Reinsurance Corp. of America
|Docket Nº:||11-3234, 11-3262.|
|Citation:||693 F.3d 417|
|Opinion Judge:||AMBRO, Circuit Judge.|
|Party Name:||PACIFIC EMPLOYERS INSURANCE COMPANY, Appellant (No. 11-3262) v. GLOBAL REINSURANCE CORPORATION OF AMERICA, formerly known as Constitution Reinsurance Corporation, Appellant (No. 11-3234).|
|Attorney:||Carter G. Phillips, Esq. (Argued), Sidley Austin LLP, Washington, DC, William M. Sneed, Esq., Jason M. Adler, Esq., Sidley Austin LLP, Chicago, IL, Ellen K. Burrows, Esq., Christine Gellert Russell, Esq., Brendan Mcquiggan, Esq., White and Williams LLP, Philadelphia, PA, for Pacific Employers Ins...|
|Judge Panel:||Before: AMBRO, VANASKIE and VAN ANTWERPEN, Circuit Judges.|
|Case Date:||September 07, 2012|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued June 19, 2012.
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In 1980 Pacific Employers Insurance Company (" PEIC" ) purchased a certificate of reinsurance (the " Certificate" ) from Constitution Reinsurance Corporation (" Constitution" ), the predecessor of Global Reinsurance Corporation of America (" Global" ). In this case, one sentence from that Certificate stands in the spotlight. That sentence reads, " As a condition precedent, the Company [ i.e., PEIC] shall promptly provide the Reinsurer [ i.e., Constitution, now Global] with a definitive statement of loss on any claim or occurrence reported to the Company and brought under this Certificate which involves a death, serious injury or lawsuit."
When we read this sentence in the context of the entire Certificate, we agree with the District Court that it is fairly susceptible to only one reasonable interpretation. PEIC must provide Global with a definitive statement of loss (" DSOL" ) on a subset of claims or occurrences, specifically
those that involve a death, serious injury or lawsuit. When must PEIC do this? We believe it is promptly after someone reports such a claim or occurrence to it, not promptly after it demands indemnity from Global. If PEIC dawdles, the consequences can be severe. PEIC's compliance with this provision is a condition precedent to Global's duty to reinsure— that is, its duty to make indemnity payments relating to the underlying claim or occurrence— and not merely its duty to make such payments promptly.
Parting ways with the District Court, we hold that this provision is enforceable as written. Our choice-of-law analysis points to New York, not Pennsylvania, law. Under New York law, when a reinsurance contract expressly requires a reinsured to provide its reinsurer with prompt notice of a claim or occurrence as a condition precedent to coverage and the reinsured fails to do so, that failure excuses the reinsurer from its duty to perform, regardless whether the reinsurer suffered prejudice as a result of the late notice. For these reasons, and because no genuine issue of material fact remains, we reverse the District Court's Final Order and Judgment and remand with instructions that it enter a judgment of non-liability in Global's favor.
I. Factual and Procedural Background
A. Reinsurance Basics
A brief reinsurance primer is in order.1 Put colloquially, reinsurance is insurance for insurance companies. A reinsurer agrees to indemnify a reinsured for certain payments the latter makes under one or more of its issued policies. In return, the reinsurer receives a share of the underlying premiums. Ceding a portion of an insured risk prevents a single catastrophic loss from hurling the reinsured into insolvency. It also allows the reinsured to invest more capital or to insure more risks.
The reinsured may be either a primary or an excess insurer. Both cover policy holders directly, but excess coverage kicks in only after an insured's primary coverage is exhausted. In contrast, reinsurers do not cover policy holders directly.2 Instead, they issue " certificates" of reinsurance to their reinsureds.
There are two basic types of reinsurance: treaty and facultative.
Under a reinsurance treaty, the reinsurer agrees to accept an entire block of business from the reinsured. Once a treaty is written, a reinsurer is bound to accept all of the policies under the block of business, including those as yet unwritten. Because a treaty reinsurer accepts an entire block of business, it does not assess the individual risks being reinsured; rather, it evaluates the overall risk pool.
Facultative reinsurance entails the ceding of a particular risk or policy. Unlike a treaty reinsurer who must accept all covered business, the facultative reinsurer assesses the unique characteristics of each policy to determine whether to reinsure the risk, and at what price. Thus, a facultative reinsurer retains
the faculty, or option, to accept or reject any risk.
N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194, 1199 (3d Cir.1995) (internal citations and quotation marks omitted).
B. Buffalo Forge Purchases Insurance; PEIC Purchases Reinsurance
Our story begins when the Buffalo Forge Company (" Buffalo Forge" ), a manufacturing company located principally in Buffalo, New York, purchased insurance for itself and its affiliates. First, it bought a " comprehensive general liability insurance policy" (the " Primary Policy" ) from Utica Mutual Insurance Company. That policy had a $1 million limit. It also purchased an " excess blanket catastrophe liability policy" (the " Excess Policy" ), with the same policy period, from PEIC, then a California stock insurance company located in Los Angeles. The Excess Policy provided $9 million of coverage in excess of the Primary Policy's $1 million.
Meanwhile, to spread some of the risk of the Excess Policy, PEIC purchased the Certificate (a facultative reinsurance contract) from Constitution, a New York corporation located in New York. Under the Certificate, PEIC retained the first $1 million of the Excess Policy and Constitution agreed to reinsure 25% of the next $4 million, with a $1 million limit.
It does not appear that there was any direct " negotiation" over the Certificate's terms and conditions. While preparing to issue the Excess Policy, PEIC— through its Buffalo underwriting office— asked a broker in Minnesota to make inquiries about reinsurance coverage. The broker then communicated with several reinsurers, including Constitution. It sent a telex, dated May 30, 1980, to Constitution in New York to confirm that it was seeking binding reinsurance effective June 1, 1980, with PEIC retaining the first $1 million and Constitution reinsuring a 25% share of the next $4 million, in exchange for a $15,000 gross premium. Constitution replied by telex on June 5, 1980, confirming its acceptance of PEIC's terms. The broker and Constitution had further exchanges in September 1980 about the payment of premiums and the issuance of the Certificate. Eventually Constitution caused the Certificate, according to its signature line, " to be signed by its President and Secretary at New York, New York," and sent it to PEIC's broker in Minnesota. In return, PEIC sent Constitution's share of the premiums from Buffalo Forge to PEIC's Minnesota broker, who forwarded it to Constitution in New York.
To offset further the risk of the Excess Policy, three other reinsurers also participated in Constitution's reinsured layer. Of the four, two were New York companies, one an Illinois company, and one a Massachusetts company.
Eighteen and nineteen years after the issuance of the Certificate, respectively, PEIC and Constitution underwent corporate reorganization. In 1998, Gerling Global Reinsurance Corporation acquired Constitution and merged it into a newly formed corporation that is now Global Reinsurance Corporation of America, the appellant here. Like its predecessor, Global is a New York corporation with its principal place of business in New York. PEIC underwent a more significant change in 1999. Previously a California company located in Los Angeles, that year PEIC became a Pennsylvania corporation with its primary place of business in Philadelphia.
C. The Terms and Conditions of the Certificate
The Certificate is four pages long and does not contain an express choice-of-law provision. On the first page, Items 3 and
4 set out the amount of risk retained by PEIC (referred to as the Company) and the amount of reinsurance accepted by Constitution (referred to as the Reinsurer). Specifically, they state:
ITEM 3— COMPANY RETENTION
THE FIRST $1,000,000 SUBJECT TO FACULTATIVE REINSURANCE.
ITEM 4— REINSURANCE ACCEPTED
$1,000,000 ANY ONE OCCURRENCE AND IN THE AGGREGATE WHERE APPLICABLE PART OF $4,000,000 WHICH IS EXCESS OF $1,000,000 WHICH IN TURN IS EXCESS OF UNDERLYING INSURANCE.
Item 5 indicates that Constitution's " Basis of Acceptance" is " Excess of Loss," which is later defined to mean that " [t]he limit(s) of liability of the Reinsurer, as stated in Item 4 of the Declarations (Reinsurance Accepted) applies(y) only to that portion of loss settlement(s) in excess of the applicable retention of the Company as stated in Item 3 of the Declarations."
The second page is titled " Reinsuring Agreements and Conditions." Significantly, the preamble on this page states the fundamental nature of the agreement:
In consideration of the payment of the premium, and subject to the terms, conditions and limits of liability set forth herein and in the Declarations made a part thereof...
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