AXA Marine and Aviation Ins. (UK) Ltd. v. Seajet Industries Inc., 1107

• Decision Date: 24 May 1996
• Docket Number: No. 1107,D,1107
• Citation: 84 F.3d 622
• Parties: AXA MARINE AND AVIATION INSURANCE (UK) LIMITED, and Marine Insurance Co. Ltd., Plaintiffs-Appellees, v. SEAJET INDUSTRIES INC., Sea Jet Trucking Inc., and A.P.A. Warehouse Inc., Defendants-Appellants. ocket 95-7821.
• Court: U.S. Court of Appeals — Second Circuit

Page 622

84 F.3d 622

AXA MARINE AND AVIATION INSURANCE (UK) LIMITED, and Marine Insurance Co. Ltd., Plaintiffs-Appellees, v. SEAJET INDUSTRIES INC., Sea Jet Trucking Inc., and A.P.A Warehouse Inc., Defendants-Appellants.

No. 1107, Docket 95-7821.

United States Court of Appeals Second Circuit.

Argued Feb. 29, 1996.

Decided May 24, 1996.

Mark I. Silberblatt, New York City (Edward H. Burnbaum, Lynch Rowin Novack Burnbaum & Crystal, New York City, of counsel), for Appellants.

Brendan J. Malley, New York City (Mendes & Mount, New York City, of counsel), for Appellees.

Before: VAN GRAAFEILAND, MESKILL and WINTER, Circuit Judges.

MESKILL, Circuit Judge:

This is an appeal from a final judgment of the United States District Court for the Southern District of New York, Leisure, J., Axa Marine and Aviation Ins. (UK) Ltd. v. Seajet Indus., 891 F.Supp. 978 (S.D.N.Y.1995), denying the motion for summary judgment by defendants-appellants Seajet Industries, Inc., Seajet Trucking Inc., and A.P.A. Warehouse, Inc. (Insureds), and granting the cross-motion for summary judgment by plaintiffs-appellees AXA Marine and Aviation Insurance (UK) Limited, and The Marine Insurance Co., Limited (Underwriters). We have appellate jurisdiction under 28 U.S.C. § 1291.

Underwriters brought the present action under the Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaration that their obligation to defend and/or indemnify Insureds was excused by Insureds' failure to provide timely notice of claim, as required by the governing policy. The district court held that New York's "no prejudice" rule applied to the instant dispute, and that Underwriters therefore were entitled to refuse to defend and/or indemnify Insureds without making a showing of prejudice resulting from the failure by Insureds to provide timely notice of claim. Insureds appealed.

BACKGROUND

The facts of this case are not in dispute. Insureds owned and operated a trucking business and a number of warehouses located in Brooklyn, New York. Underwriters issued a policy covering Insureds' liability incurred between March 29, 1990 and March 28, 1991 resulting from damage to or loss of the property of others while in the care of Insureds. On December 5, 1990, the Brooklyn warehouses were robbed, and property belonging to several bailors was taken. Insureds gave prompt notice of the robbery to their insurance broker, Coverage Consultants, Inc., which in turn notified Underwriters. One of the bailors, Cherry Stix, Ltd., was insured by American Motorists Insurance Company (American Motorists). American Motorists, as subrogee of Cherry Stix, Ltd., brought an action against Insureds in New York State Supreme Court, and served a summons on Insureds some time after December 20, 1991.

Insureds never responded to the summons and never forwarded a copy of the summons to Underwriters as required by the policy. Subsequently, on March 30, 1992, American Motorists gave notice to Insureds that a motion for default would be made within the next thirty days. Again, Insureds did not respond or notify Underwriters. On or about July 20, 1992, American Motorists served a motion for default judgment in the amount of $595,032. Again, there was no response by Insureds and no notice given to Underwriters. Finally, on September 16, 1992, default judgment was entered against Insureds.

After entry of the default judgment, Insureds notified Underwriters of the American Motorists action. Underwriters assigned counsel to the matter, subject to a reservation of rights, in an effort to have the default judgment vacated. Counsel was successful in vacating the default judgment, but while the motion to vacate was pending, Underwriters denied coverage under the policy on the ground that Insureds failed to provide prompt notice of the American Motorists action. Underwriters then brought this action seeking a declaratory judgment that their obligations under the policy were terminated.

The relevant provision of the policy provided that:

If any claim(s), whether groundless or not, be made against the Insured on account of loss of or damage to property, the Insured shall notify the Company as soon as practicable and if suit is filed against the Insured to enforce any claim(s), the Insured shall immediately forward to the Company all summons or other notice(s) served upon the Insured.

The district court concluded as a matter of law, and the parties agree, that Insureds failed to notify Underwriters of the American Motorists claim or forward the relevant suit papers in a reasonable time. However, the parties disagree as to the need for Underwriters to show that they were prejudiced to deny coverage.

DISCUSSION

A. Standard of Review

We review de novo the district court's grant of summary judgment. Tomka v. Seiler Corp., 66 F.3d 1295, 1304 (2d Cir.1995). Summary judgment is not appropriate unless there are no genuine issues of material fact and unless the undisputed facts warrant judgment as a matter of law for the moving party. Id. The facts in this case are not in dispute, thus summary judgment is proper if Underwriters are entitled to judgment as a matter of law. The district court properly held that New York law governs this dispute. Steinbach v. Aetna Cas. & Sur. Co., 81 A.D.2d 382, 385, 440 N.Y.S.2d 637, 640 (1st Dep't 1981) (holding that a court should apply the law of the state "which the parties understood would be the principal location of the insured risk and the one most intimately concerned with the outcome of the litigation." (quotations omitted)).

B. The Alleged Harms Suffered by Underwriters

Underwriters allege several harms resulting from Insureds' failure to give Underwriters notice of the American Motorists claim. They cite the default judgment entered against their insured, for which Underwriters could have been held directly responsible under N.Y. Ins. Law § 3420(a)(2) (McKinney 1985). ¹ Underwriters also incurred legal expenses in persuading the New York Supreme Court to vacate the default judgment. Furthermore, Underwriters claim that the delay caused them to lose the opportunity to settle the American Motorists claim early, before litigation positions hardened.

If Underwriters proved that these alleged harms prejudiced them, they would be legally justified in terminating their duty to defend and indemnify. Unigard Security Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576, 581, 584 N.Y.S.2d 290, 292, 594 N.E.2d 571, 573 (1992); Restoration Realty Corp. v. Robero, 58 N.Y.2d 1089, 1091, 462 N.Y.S.2d 811, 812, 449 N.E.2d 705, 705-06 (1983); Toyomenka Pacific Petroleum v. Hess Oil V.I. Corp., 771 F.Supp. 63, 68 (S.D.N.Y.1991). However, Underwriters need not demonstrate prejudice to justify terminating their obligations under the policy. The New York Court of Appeals has adopted the no prejudice rule in cases involving a failure to give notice of occurrence and we believe that that court would apply the same rule to a case like this one, involving the failure to give notice of claim. See Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114, 119 (2d Cir.1994) (stating that "[w]here the substantive law of the forum state is uncertain or ambiguous, the job of the federal courts is carefully to predict how the highest court of the forum state would resolve the uncertainty or ambiguity." (citation omitted)).

C. New York's "No Prejudice" Rule

Under the no prejudice rule, "the notice provision for a primary insurer operates as a condition precedent and ... the insurer need not show prejudice to rely on the defense of late notice." Unigard Security, 79 N.Y.2d at 581, 584 N.Y.S.2d at 292, 594 N.E.2d at 573 (citations omitted). Thus the no prejudice rule is an exception to two principles of the common law of contracts:

(1) that ordinarily one seeking to escape the obligation to perform under a contract must demonstrate a material breach or prejudice ...; and (2) 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.

Id. (citations omitted).

The New York Court of Appeals has characterized the no prejudice rule as a "presumption of prejudice." Unigard Security, 79 N.Y.2d at 584, 584 N.Y.S.2d at 294, 594 N.E.2d at 575 (stating, in a late notice of occurrence case, that a "reinsurer must demonstrate how [late notice] was prejudicial and may not rely on the presumption of prejudice that applies in the late notice disputes between primary insurers and their insureds" (emphases added)). Except in cases where some excuse makes the delayed notice reasonable, it is clear that the presumption is a conclusive one. New York v. Blank, 27 F.3d 783, 793-94 (2d Cir.1994) (stating that "under New York law, '[a]bsent a valid excuse' the insured's failure to provide notice 'vitiates coverage' ") (quoting In re Allcity Ins. Co. and Jiminez, 78 N.Y.2d 1054, 1055, 576 N.Y.S.2d 87, 88, 581 N.E.2d 1342, 1343 (1991)).

The no prejudice rule relieves the burden on the insurer to prove that prejudice resulted from the insured's failure to provide notice. The New York Court of Appeals recently noted that other courts have articulated the various rationales for the no prejudice rule. Unigard Security, 79 N.Y.2d at 581-82, 584 N.Y.S.2d at 292, 594 N.E.2d at 573. Among those rationales cited by the Unigard Security Court were

that 'the insurer [must have] an opportunity to protect itself' ...; that without timely notice, 'an insurer may be deprived of the opportunity to investigate a claim and is rendered vulnerable to fraud' ...; and that late 'notification may ... prevent the insurer from providing a sufficient reserve fund' ( ...; and see, Security Mut. Cas. Co. v. Century Cas. Co., 531 F.2d 974, 978 [ (10th Cir.), cert. denied, 429 U.S. 860, 97 S.Ct. 161, 50 L.Ed.2d 137 (1976) ] [prompt notice permits the primary insurer to make an early estimate of potential exposure, to investigate the claim while witnesses...