Christiania General Ins. Corp. of New York v. Great American Ins. Co.

• Decision Date: 03 September 1992
• Docket Number: No. 862,D,862
• Citation: 979 F.2d 268
• Parties: CHRISTIANIA GENERAL INSURANCE CORPORATION OF NEW YORK, Plaintiff-Appellant, v. GREAT AMERICAN INSURANCE COMPANY, Defendant-Appellee. ocket 91-7912.
• Court: U.S. Court of Appeals — Second Circuit

Page 268

979 F.2d 268

CHRISTIANIA GENERAL INSURANCE CORPORATION OF NEW YORK Plaintiff-Appellant, v. GREAT AMERICAN INSURANCE COMPANY, Defendant-Appellee.

No. 862, Docket 91-7912.

United States Court of Appeals Second Circuit.

Argued Feb. 3, 1992.

Decided Sept. 3, 1992.

James A. Plaisted, Roseland, N.J. (Stuart A. Smith, Donald A. Emeigh, Jr., Walder, Sondak, Berkeley & Brogan, P.A., Roseland, N.J., of counsel), for plaintiff-appellant.

Thomas R. Newman, New York City (Thomas M. Bower, Barry T. Bassis, Newman & Bower, P.C., New York City, of counsel), for defendant-appellee.

Before OAKES, Chief Judge, ^* MESKILL and CARDAMONE, Circuit Judges.

CARDAMONE, Circuit Judge:

This appeal is from a grant of summary judgment that dismissed a declaratory judgment action brought in the United States District Court for the Southern District of New York (Leisure, J.) by a reinsurer seeking a declaration that it be relieved of indemnifying its reinsured because the latter failed to provide it with prompt notice of claims. Plaintiff insists that defendant had a duty to warn of the great exposure it had with regard to accidents involving all-terrain vehicles (ATVs) and that defendant put off, hesitated, and delayed communicating this information. When defendant finally gave notice, plaintiff thinks defendant hemmed and hawed so that the information it received was inaccurate.

BACKGROUND

Great American Insurance Co. (Great American or defendant) provided excess, or umbrella, products liability insurance to American Honda Motor Co. (Honda), the wholly-owned American subsidiary of a leading Japanese automobile manufacturer. Excess insurance is designed to provide high limits of coverage to guard against catastrophic loss. See 3 Dunham, New York Insurance Law § 39.01 (1992) (Dunham). Great American was the third level provider of excess insurance to Honda for the policy years 1980 to 1983 (covering September 1980 to October 1984), responsible for losses in excess of $15, 15, 17 and 18 million for each policy year, for amounts up to $10, 10, 10 and 7 million, respectively.

Just as insurance is designed to distribute risk among those participating in a certain activity, so too is reinsurance. See R. Keeton, Insurance Law, at 7 (1971) (Keeton). Thus, when an insurer wishes to transfer some of the risk it has undertaken under its policy, it "cedes" a certain portion of that risk to another insurance company--the reinsurer. See Colonial Am. Life Ins. Co. v. Commissioner, 491 U.S. 244, 246-47, 109 S.Ct. 2408, 2411, 105 L.Ed.2d 199 (1989); People ex rel. Sea Ins. Co. v. Graves, 274 N.Y. 312, 315, 8 N.E.2d 872 (1937). Simply put, "[r]einsurance is a contract by which one insurer insures the risks of another insurer." People ex rel. Continental Ins. Co. v. Miller, 177 N.Y. 515, 521, 70 N.E. 10 (1904). There are two types of reinsurance, facultative and treaty. Treaty reinsurance obligates the reinsurer to accept in advance a portion of certain types of risks that the ceding company underwrites. Facultative reinsurance covers only a particular risk or a portion of it, which the reinsurer is free to accept or not. See Matter of Midland Ins. Co., 79 N.Y.2d 253, 258, 582 N.Y.S.2d 58, 590 N.E.2d 1186 (1992); Sumitomo Marine & Fire Ins. Co., Ltd. v. Cologne Reinsurance Co. of Am., 75 N.Y.2d 295, 301, 552 N.Y.S.2d 891, 552 N.E.2d 139 (1990).

Great American reinsured a portion of its Honda excess insurance policy under facultative reinsurance certificates with plaintiff Christiania General Insurance Corporation of New York (Christiania or plaintiff). A reinsurance contract is essentially a contract of indemnity, see Graves, 274 N.Y. at 315, 8 N.E.2d 872, and by the terms of the agreements Christiania was obligated to indemnify Great American under the four policies in question up to a total of $3 million. In each policy year Great American retained $250,000 of the risk, and the remainder of the $33 million exposure was reinsured with other companies. Each of the facultative certificates entered into between Great American and Christiania contained a "prompt notice" and "right to associate" clause fairly typical of reinsurance contracts:

Prompt notice shall be given by [Great American] to [Christiania] of any occurrence or accident which appears likely to involve this reinsurance and ... [Christiania] shall ... have the right and be given the opportunity to associate with [Great American] ... in the defense and control of any claim, suit or proceeding which may involve this reinsurance ...

The Honda policies reinsured contained both "per occurrence" and "aggregate" limits. Hence, the reinsurers could be called upon to indemnify for a single loss to the extent it exceeded Great American's underlying layers or for losses which, in the aggregate, exceeded the underlying layers for a particular policy year.

The principal question presented on this appeal is whether Great American satisfied its obligation to provide Christiania with "prompt notice ... of any occurrence or accident which appear[ed] likely to involve [the parties'] reinsurance." We think there are genuine material factual disputes that must be resolved before this question may be answered, and therefore reverse the district court's grant of summary judgment.

FACTS

Among the products distributed by Honda were ATVs. The significant potential exposure stemming from ATV use was first suggested in 1985 when the Consumer Products Safety Commission issued a proposed rule as a result of the increasing number of serious injuries associated with them, and ABC News' program 20/20 aired a report detailing the risks posed by ATVs. In April of 1985, Johnson & Higgins (J & H), Honda's insurance broker, notified Great American of "the possibility that your policy for each of [the 1979 and 1980] policy years may become involved." A month later, defendant was similarly notified by J & H concerning a particular claim involving the 1982 policy year. In October 1985 J & H sent another memo to Great American concerning the 1979 and 1980 policy years, warning defendant's claims manager Richard Andolina that "it is certainly possible [the] liability coverage [of the Insurance Company of North America (INA), the excess insurance carrier for the layer immediately below Great American] for each of the policy periods ... may be exhausted. Therefore your coverage would come into operation to protect the interests of [Honda]." Handwritten on the bottom of this memo is the following:

1. Verify accuracy of past claim payments to exhaust INA's coverage

. . . . .

4. Determine identity of next excess layer above us

5. Identify application of our treaty reinsurance & place on notice

. . . . .

10. Any facultative reinsurance for us?

The often extremely serious personal injury claims being brought against Honda as a result of ATV accidents continued to mount and by 1986--though not certain which policy year would definitely be affected or when--Great American officials knew of their potential exposure for one or more policy years. The company was receiving continual updates from J & H and computer runs of claims from INA. A handwritten May 1986 memo prepared by Jerry Runnels, defendant's vice-president of claims, asks "Have reinsurers ever been put on notice of potential exposure? Send copies of latest loss runs and report." A June 1986 Runnels report concluded that "we have [i]mminent exposure to our layers of coverage ... for the policy years ... 1980 to 1981, and 1982 to 1983." The memo continued, "we will have to decide how to notify our reinsurers and which reinsurers should be notified at this time."

In November of 1986 INA informed defendant with respect to the 1983 policy year that "[a]t the present time, we would anticipate that our policy will be fully expended within the next 12 months or possibly sooner," and suggested Great American "make the necessary arrangements to become familiar with this policy year in the near future." That same month Honda notified defendant, as reflected in defendant's internal memo, "that they [Honda] are going through aggregate layers of coverage quickly and we are going to be involved rather soon, e.g. next 6 months on at least some of the years." Figures from Honda and INA in late 1986 and early 1987 indicated defendant's layer was pierced on an incurred basis, that is to say, the total of losses actually paid plus reserves representing expected losses exceeded INA's liability limits. A January 1987 report prepared by Runnels echoed this conclusion: "on an incurred basis we are already into our layer of coverage on 3 of the [1977-1986] policy years and with the probability of 2 others also piercing our coverage."

In the spring of 1987 Great American undertook an audit of the Honda account which, when completed in April 1987, indicated that it should establish reserves for at least the 1983 policy year and notify its reinsurers. In May 1987 defendant provided Willcox, its broker for the Christiania reinsurance certificates, with the results of the audit. Because Willcox was in the process of shutting down its facultative reinsurance operation, Great American agreed to provide notice to its reinsurers itself.

By letter dated June 19, 1987--which Christiania says it never received, the district court made no finding on this disputed point--defendant notified Christiania of "impending loss activity involving" plaintiff's reinsurance for the 1983 policy year. The letter reported that as of June 10, 1987 there remained $1.25 million in coverage under INA's layer and, considering the rate of loss payments, "the remaining coverage will be exhausted within the next 60 days. This will then bring about the active involvement of [both defendant and plaintiff]." By letter dated July 9, 1987 Christiania was notified similarly with respect to the 1982 policy year.

Great American began handling cases for Honda under the 1983 policy year on August 14, 1987 and...