AIU Ins. Co. v. Tig Ins. Co.

• Decision Date: 25 March 2013
• Docket Number: No. 07 Civ. 7052 (SHS).,07 Civ. 7052 (SHS).
• Parties: AIU INSURANCE COMPANY, Plaintiff, v. TIG INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

934 F.Supp.2d 594

AIU INSURANCE COMPANY, Plaintiff,

v.TIG INSURANCE COMPANY, Defendant.

No. 07 Civ. 7052 (SHS).

United States District Court,

S.D. New York.

March 25, 2013.

Marc Laurance Abrams, William Andrew Maher, Wollmuth Maher & Deutsch LLP, New York, NY, for Plaintiff.

Catherine E. Isely, James I. Rubin, Julie Rodriquez Aldort, Butler Ruvbin Saltarelli & Boyd LLP, Chicago, IL, Sean Thomas Keely, Hogan Lovells U.S. LLP, New York, NY, for Defendant.

OPINION & ORDER

SIDNEY H. STEIN, District Judge.

This action brings this Court into the field of reinsurance, where, according to the New York Court of Appeals, “differences have often been settled by handshakes and umpires, and pertinent precedents ... are few in number.” Sumitomo Marine & Fire Ins. Co., Ltd.-U.S. Branch v. Cologne Reinsurance Co. of Am., 75 N.Y.2d 295, 298, 552 N.Y.S.2d 891, 552 N.E.2d 139, 140 (1990). In the late 1970s and early 1980s, plaintiff AIU Insurance Company purchased nine certificates of facultative reinsurance (“CFRs” or “certificates”)—that is, reinsurance policies that cover a specified risk—from International Insurance Company. (Defendant TIG Insurance Company is the successor-in-interest to International Insurance Company and, for ease of reference, this Court shall refer exclusively to TIG.) More than two decades later, when AIU wanted to benefit from the reinsurance it had purchased, it waited over three years before notifying TIG of its claim, which TIG denied. That delay lies at the heart of this litigation.

Despite the fact that the CFRs involved a score of millions of dollars of risk, AIU and TIG had engaged in a “swift, seemingly almost casual process of contract formation that has given rise to [this] controversy.” Id., 75 N.Y.2d at 302, 552 N.Y.S.2d 891, 552 N.E.2d at 142. Crucially, none of the CFRs contained a choice-of-law clause. This matters because of a split among the states on what constitutes “prompt notice” in the reinsurance context. Traditionally, reinsurers—here, TIG—could refuse coverage if the ceding insurer—the party that purchases the reinsurance, here AIU—violates the plain language of the notice provision by failing to provide “prompt notice.” By contrast, an emerging majority of jurisdictions require the reinsurer to prove not only that it received late notice of the ceding insurer's claim, but also that the reinsurer suffered prejudice as a result of the notice being late. Illinois, where TIG claims its home office was located when the CFRs were executed, apparently follows the traditional rule that prejudice does not have to be shown by the reinsurer before the reinsurer can deny a claim: the reinsurer need only show that the notice it received was late. AIU has its principal place of business in New York, which, unlike Illinois, requires that the reinsurer not only received notice from the ceding insurer late, but also that the reinsurer suffered prejudice as a result of the late notice. Naturally, AIU argues that New York law applies to the CFRs, while TIG contends that Illinois law governs and therefore it has to show merely that it received notice of AIU's claim late in order to deny that claim.

In a Report and Recommendation filed on August 16, 2012, 2012 WL 8138275 (“Report,” Dkt. No. 128), Magistrate Judge Henry Pitman concluded that Illinois law should apply and recommended that this Court grant TIG's motion for summary judgment. This Court has conducted a thorough de novo review of Judge Pitman's well reasoned Report and Recommendation. See28 U.S.C. § 636(b)(1). For the reasons set forth below, the Court agrees with Judge Pitman's recommendations and grants summary judgment in favor of TIG.

I. BackgroundA. The Foster Wheeler Insurance Policies and Certificates of Facultative Reinsurance

This drama opens on Foster Wheeler Corporation, which, in the 1970s and early 1980s, was a manufacturer of industrial boilers and other heat exchange equipment. (TIG 56.1 ¶ 22.) From 1978 to 1982, Foster Wheeler purchased primary general liability insurance from Liberty Mutual Insurance Company, among others. ( Id. ¶ 1.) To cover any losses above the limits on these policies, Foster Wheeler also purchased three umbrella insurance policies from AIU. (AIU 56.1 ¶ 13.) These umbrella policies provided $20 million of total coverage for claims in excess of the limits contained in the Liberty Mutual policies, and covered the period from October 1, 1978 to October 1,1981. ( Id.)

After writing the umbrella policies to Foster Wheeler, AIU sought to lay off—cede—a portion of this risk upon others by purchasing reinsurance. To do this, AIU or its broker, Johnson & Higgins of New York, sent reinsurance request notes to L.W. Biegler, Inc., the Chicago-based intermediary for TIG. (Aldort Decl., Group Ex. 1.) Notably, L.W. Biegler and TIG were each wholly owned subsidiaries of Crum & Forster Insurance Companies. (TIG Resp. 56.1 ¶ 24; Reid Tr. at 26; Schwass Tr. at 25–26.) ¹ Once AIU's application was approved, L.W. Biegler, on behalf of TIG, issued AIU “binders,” the trade name for temporary policies that applied until the final CFRs were executed. (Larson Decl., Ex. 1.) Some time later, TIG issued the CFRs to AIU. (The fully executed CFRs are attached to the Declaration of Julie Rodriguez Aldort as Exhibits 11–19.)

Each of the CFRs contained essentially identical substantive terms set forth on preprinted forms. Two of the terms are especially relevant to this action. First, each CFR required a countersignature before the certificate became binding. ( E.g., Aldort Decl., Ex. 11 at 62311.) Second, the CFRs all contained identical notice provisions, which stated: “Prompt notice shall be given to the Reinsurer [TIG] by the Company [AIU] of any occurrence or accident which appears likely to involve this reinsurance ....” ( E.g., id. ¶ B.) The notice provision also gave TIG the opportunity to associate with AIU “in the defense and control of any claim, suit or proceeding involving [the] reinsurance ....” ( E.g., id.) Finally, none of the CFRs contained a choice-of-law clause or explicitly identified the place the CFRs were to be performed.

B. The Foster Wheeler Litigation

Unfortunately for Foster Wheeler, its customers, and its insurers, the products that it manufactured and AIU insured contained asbestos. As a result, Foster Wheeler has been subject to hundreds of thousands of asbestos-related lawsuits across the country. (TIG 56.1 ¶ 22.) These individual suits also gave rise to large-scale litigation among and between Foster Wheeler and its insurers. In February 2001, several London-based insurance companies sued Foster Wheeler, Liberty Mutual, TIG, and many other insurers, seeking a declaration of the obligations of the defendants with respect to asbestos-related claims made against Foster Wheeler (the “Coverage Litigation”). (TIG Resp. 56.1 ¶ 46.) Five months later, Foster Wheeler filed a third-party complaint against AIU and other excess insurers for declaratory relief concerning the excess insurers' responsibilities to pay Foster Wheeler's defense and indemnity costs. (TIG 56.1 ¶ 26.)

AIU avers that the umbrella policies were well insulated from the many asbestos-related personal injury claims. (AIU Mem. in Supp. at 7.) This confidence stemmed from the terms of the umbrella policies, which would not be triggered by any individual asbestos-related loss unless it exceeded $100,000. (AIU 56.1 ¶ 12.) AIU's sense of calm evaporated in 2003 when an individual plaintiff negotiated a settlement with Foster Wheeler worth over $10 million. (Abrams Decl., Ex. 300 at 35007.1–08.1.) Then, in a letter dated October 28, 2003, attorneys representing Foster Wheeler demanded that AIG pay nearly $20 million to cover asbestos-related personal injury claims. (Abrams Decl., Ex. 43.) AIU eventually reached a settlement agreement with Foster Wheeler in June 2006. (AIU Resp. 56.1 ¶ 35.)

C. AIU Gives Notice to TIG

Although AIU had received a demand letter from Foster Wheeler in October 2003, AIU did not notify TIG that a claim had been made against AIU until January 2007. In a letter dated January 25, 2007, Richard Kafaf, a reinsurance claims analyst for AIU, notified TIG of AIU's June 2006 settlement with Foster Wheeler and stated that AIU would begin billing TIG the next month on its reinsurance claims. (Abrams Decl., Ex. 545.) TIG responded a week later by raising the issue of late notice and reserving its rights under the CFRs. ( Id., Ex. 547.) The parties attempted to reach agreement concerning their obligations under the CFRs, but these talks failed. AIU then filed this action on August 7, 2007.

D. Procedural Background

In its Complaint, AIU asserted two claims for relief against TIG: breach of contract and declaratory judgment concerning TIG's liability under the CFRs. TIG answered and the parties proceeded to discovery. In July 2009, TIG moved for partial summary judgment on the issue of whether Illinois or New York law governed the CFRs; whether a reinsurer must prove prejudice, in addition to late notice, in order to refuse coverage under Illinois law; and whether TIG provided AIU reinsurance coverage from October 1981 to October 1982. Judge Pitman issued a Report and Recommendation agreeing with TIG on these issues. See AIU Ins. Co. v. TIG Ins. Co., No. 07 Civ. 7052, 2010 WL 850181 (S.D.N.Y. Feb. 11, 2010). However, this Court believed that TIG's motion was premature since discovery was still proceeding and vacated Judge Pitman's Report and Recommendation in large part—but adopted the recommendation that TIG did not provide coverage from 1981 to 1982. See AIU Ins. Co. v. TIG Ins. Co., No. 07 Civ. 7052, 2010 WL 882879 (S.D.N.Y. Mar. 9, 2010).

Discovery is now complete and the parties have cross-moved—TIG for summary judgment and AIU for partial summary judgment. AIU argues that New York law applies to the CFRs, and thus TIG must prove not only that AIU's notice was late, but that TIG suffered prejudice as a result....