British Ins. Co. of Cayman v. Safety Nat. Cas.

Decision Date01 June 2001
Docket NumberNo. CIV. 99-3343(WGB).,CIV. 99-3343(WGB).
Citation146 F.Supp.2d 585
PartiesBRITISH INSURANCE COMPANY OF CAYMAN, Plaintiff, v. SAFETY NATIONAL CASUALTY CORPORATION, Defendant.
CourtU.S. District Court — District of New Jersey

Shawn L. Kelly, Thomas J. Perry, Andrea J. Giannetta, Riker, Danzig, Scherer, Hyland & Perretti LLP, Morristown, NJ, for Plaintiff British Insurance Company of Cayman.

John C. Sullivan, Post & Schell, P.C., Voorhees, NJ, for Defendant Safety National Casualty Corporation.

OPINION

BASSLER, District Judge:

At issue in this litigation is whether an insurance company failed to give timely notice of an underlying claim to its reinsurer and if so, whether the reinsurer must show that it suffered prejudice as a result of such late notice in order to escape its contractual indemnification obligation under the reinsurance policy.

Plaintiff British Insurance Company of Cayman ("BICC") is the insurance company seeking recovery of reinsurance balances against its reinsurer, Safety National Casualty Corporation ("Safety"). BICC maintains that its predecessor-in-interest gave Safety notice of the underlying claim in 1994, which was nine years after initially learning of that claim. BICC claims that such notice was timely because the obligation to provide notice did not arise until that time. Moreover, it claims that even if notice was untimely, it should prevail on its motion for summary judgment because Safety was not prejudiced by any delay.

Safety does not dispute that the contract for reinsurance applies to the losses at issue; rather, Safety has filed a cross motion for summary judgment contending that it is not obligated to indemnify BICC because BICC's predecessor failed to provide timely notice of the underlying claim. According to Safety, even if it was notified of the underlying claim in 1994, which it disputes, a nine year lapse is untimely as a matter of law. Alternatively, Safety contends that at the latest, BICC's obligation to provide notice arose in 1992 and that the resulting two year delay is also untimely.

The Court has diversity jurisdiction over this matter pursuant to 28 U.S.C. § 1332.1 Oral argument was heard on May 7, 2001. For the reasons set forth below, BICC's motion for summary judgment is denied. Safety's cross motion for summary judgment is granted.

I. Insurance and Reinsurance Policies

American Centennial Insurance Company ("ACIC"), BICC's predecessor-in-interest, issued May Department Stores ("May") an insurance policy that provided excess workers' compensation and employer liability coverage (the "Policy") from February 1, 1982 to February 1, 1983. The Policy provided $10,000,000 in workers' compensation coverage in excess of a $250,000 self-insured retention. The self-insured retention required May to pay the first $250,000 before ACIC would have any obligation to pay under the Policy.

ACIC transferred, or ceded, risk to Safety under the Policy by buying reinsurance from Safety in the form of a Certificate of Facultative Reinsurance ("Facultative Reinsurance"). Pursuant to the Facultative Reinsurance, Safety received premium ceded by ACIC and undertook to reimburse ACIC's losses up to a specified limit. Specifically, under the Facultative Reinsurance, Safety is to reimburse ACIC for any losses in excess of the $250,000 self-insured retention up to $750,000, and for any losses in excess of $5,250,000 up to $5,000,000.

The Facultative Reinsurance contains a notice provision, which states:

The Company shall advise the Reinsurer promptly of any claim and any subsequent developments pertaining thereto which, in the opinion of the Company, may involve the reinsurance hereunder. ... The Company, when so requested, will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense or control of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense and control of such claim, suit or proceeding.

(Paragraph 4 of Certificate of Facultative Reinsurance attached to Certification of Thomas Perry, Esq. ("Perry Cert.") as Ex. A.)

Pursuant to an Assumption Reinsurance Agreement dated August 29, 1996, ACIC assigned the Facultative Reinsurance to British International Insurance Company ("British International"). Then pursuant to an Assumption Reinsurance Agreement dated November 30, 1998, BICC assumed the Facultative Reinsurance.

II. Kirtos Worker's Compensation Claim

Anthony Kirtos ("Kirtos") was employed by Ma, as a truck driver. On March 18, 1982, Kirtos sustained a back and neck strain while carrying a sofa. He subsequently filed a workers' compensation claim against May. As of December 31, 2000, BICC's losses on the Kirtos claim totaled $62,172.61. Continuing to make payments to May as it is obligated to do, BICC has determined that its overall exposure on this claim, exclusive of what it has paid to date, is at least $197,823.79, based on Kirtos' life expectancy and the present value of his benefits.

The Kirtos claim has been managed by Central Regional Claims Corporation ("CRCC"), the claims handling entity for May. Among other things, CRCC (1) obtained surveillance reports and independent medical examinations of the claimant; (2) paid the claimant's medical bills; (3) reviewed the claimant's medical reports and decisions of the Bureau of Workers' Compensation and Industrial Commission of Ohio regarding the claimant; and (3) coordinated the defense of the Kirtos claim, which BICC alleges included efforts, at settlement.

III. Notices to ACIC
A. First Notice to ACIC

By letter dated March 15, 1985, CRCC reported the Kirtos claim to May's insurance broker, Marsh & McLennan ("Marsh"). Marsh notified ACIC of the Kirtos claim by letter dated April 9, 1985. (March 15, 1985 letter attached to Certification of John C. Sullivan, Esq. ("Sullivan Cert.") as Ex. B.) In that letter, CRCC stated that its submission of the claim "[did] not `necessarily indicate a belief that the excess coverage will be involved, but is rather, an interpretation of the carriers' wishes to be notified." (Id.)

The Claims Summary Report, which was included in the materials provided to ACIC, advised ACIC that as of August 15, 1984, Kirtos was receiving temporary and total disability benefits ("TTD"). It was estimated that the TTD benefits would continue for 127 weeks. (Claims Summary Report attached to Sullivan Cert. as Ex. B.)

On April 24, 1985, after receiving notice of the Kirtos claim, ACIC opened a claims file. ACIC closed the file on that same day, or shortly thereafter, upon determining that the claim "won't reach ACIC layer." (Worksheet attached to Sullivan Cert. as Ex. B.)

There is no dispute that ACIC did not provide notice to Safety or take any action on the Kirtos claim from at least May 1985 until April 1992.

B. Second Notice to ACIC

On April 9, 1992, at CRCC's request, Marsh advised ACIC that the Kirtos claim was still active.

By letter dated June 11, 1992, CRCC sent its Kirtos claim file dating back to April 1989, to ACIC and advised that it was continuing to investigate the claim in order to "better evaluate" the exposure for permanent total disability benefits ("PTD"). (June 11, 1992 letter attached to Sullivan Cert. as Ex. J.) The parties dispute whether the June 11, 1992 letter revealed that Kirtos had filed an application for PTD benefits which was then pending.

The letter did, however, provide ACIC with a summary of the amounts spent as of that date and CRCC's reserve analysis for the Kirtos claim. CRCC also informed ACIC that over $152,000 had been paid as TTD benefits, that more than $17,000 had been paid in medical expenses with $8,564 incurred but not paid, and that over $18,000 had been paid in other expenses. Moreover, the information provided by CRCC indicated that May had established a total reserve of $350,900 for the Kirtos claim, which was $100,000 above the $250,000 self-insured retention.

CRCC acknowledged in its June 11, 1992 letter that "any money [paid out] in excess of [its] self-insured retention of $250,000 would need prior approval from [ACIC's] office." Consequently, according to BICC, ACIC's claims examiner spoke to personnel at May on more than one occasion and was told that they did not expect the Kirtos claim to exceed the self-insured retention. (Deposition of R. Blaine Smith ("Smith Dep.") 38:16-23, attached to Sullivan Cert. as Ex. H.) Safety, however, disputes this fact, contending that the claims file contains no documentation of any such telephone contact between ACIC and CRCC.

While Safety claims that ACIC did not undertake any activity concerning the Kirtos claim between August 1992 and March 1994, BICC concedes only that the ACIC claims file does not include any documentation of such activity between CRCC and ACIC.

C. Third Notice to ACIC

The Industrial Commission of Ohio awarded Kirtos PTD benefits on August 17, 1993. ACIC claims, and Safety disputes, that in or about March 1, 1994, ACIC learned for the first time that Kirtos had been awarded PTD benefits. As evidenced by a memorandum from ACIC's claims examiner, R. Blaine Smith ("Smith"), to ACIC's Assistant Vice President and Counsel, Luann Petrellis ("Petrellis"), dated March 23, 1994, ACIC knew, at least by that date, that Kirtos had been awarded PTD. (Deposition of Luann Petrellis ("Petrellis Dep."), 76:8-77:16 and Ex. 10 of Petrellis Dep. attached to Pl.'s Appendix to Local Civil Rule 56.1 Statement, Vol. I as Ex. B.) In that March 23rd memorandum, Smith recommended to Petrellis that ACIC set an indemnity reserve of $100,000 for the Kirtos claim; the reserve was posted on April 1, 1994. ACIC had not previously established any reserve for the Kirtos claim.

IV. Notices to Safety
A. First Notice to Safety

In theory, when a reserve is established on a claim, ACIC's "ReBus" computer system is supposed to automatically generate a Reinsurance Loss Advice ("RL...

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