Continental Cas. Co. v. Stronghold Ins. Co., Ltd.

• Decision Date: 13 February 1996
• Docket Number: No. 328,328
• Citation: 77 F.3d 16
• Parties: CONTINENTAL CASUALTY COMPANY, Plaintiff-Appellee, v. STRONGHOLD INSURANCE COMPANY, LTD., Excess Insurance Co., Ltd., World Auxiliary Insurance Corp., Ltd., River Thames Ins. Co., Minister Insurance Company, Ltd., British National Insurance Company, Alba General Insurance Co., Ltd., Nationwide General Insurance Company, National Casualty Co., Anglo French Insurance Co., Ltd., Underwriting Syndicates at Lloyd's Subscribing to Policies K66974, K76590, K76591, K76592, K78682, K78683, K78684, K10942, K10493, Swiss Union General Insurance Company, Ltd., Liberty Mutual Insurance Company, Defendants-Appellants, Andrew Weir Insurance Co., Ltd., Orion Insurance Co., PLC, English & American Insurance Company, Ltd., Defendants. Docket 95-7326.
• Court: U.S. Court of Appeals — Second Circuit

Page 16

77 F.3d 16

64 USLW 2564

CONTINENTAL CASUALTY COMPANY, Plaintiff-Appellee, v. STRONGHOLD INSURANCE COMPANY, LTD., Excess Insurance Co Ltd., World Auxiliary Insurance Corp., Ltd., River Thames Ins. Co., Minister Insurance Company, Ltd., British National Insurance Company, Alba General Insurance Co., Ltd. Nationwide General Insurance Company, National Casualty Co. Anglo French Insurance Co., Ltd., Underwriting Syndicates at Lloyd's Subscribing to Policies K66974, K76590, K76591 K76592, K78682, K78683, K78684, K10942, K10493, Swiss Union General Insurance Company, Ltd., Liberty Mutual Insurance Company, Defendants-Appellants, Andrew Weir Insurance Co., Ltd., Orion Insurance Co., PLC, English & American Insurance Company, Ltd., Defendants.

No. 328.

Docket 95-7326.

United States Court of Appeals, Second Circuit.

Argued Oct. 6, 1995.

Decided Feb. 13, 1996.

AFFIRMED.

David J. Grais, Grais & Phillips, New York City (Michael C. Zeller, of counsel), for defendants-appellants.

Michael H. Goldstein, Mound, Cotton & Wollan, New York City, for plaintiff-appellee.

Before ALTIMARI, McLAUGHLIN, and PARKER, Circuit Judges.

McLAUGHLIN, Circuit Judge:

Reinsurance is not new. See People ex rel. Sea Ins. Co. v. Graves, 274 N.Y. 312, 315, 8 N.E.2d 872, 873-74 (1937). It dates back to the time the first bookie, fearful that he could not cover all his bets in the event he were to lose, decided to spread his risk by "laying-off" some of the risks by getting other bookies to share his exposure. In a more respectable vein, reinsurance is a device whereby an insurance company that has assumed uncomfortable levels of risk buys insurance from another insurance company to assume some of those risks. Id. The basic insurer is then referred to as the "reinsured" or, sometimes as the "ceding insurer." The reinsurer is called precisely that. By contract, the reinsurer agrees to assume some or all of the risk that the ceding insurer has assumed. Id.

Continental Casualty Company ("Continental") in this case is the ceding insurer. It issued many liability policies to hospitals. It then laid off some of these risks to several reinsurance companies (the "reinsurers")--defendants in this action. In the 1980's, Continental paid out substantial sums to settle a spate of medical malpractice suits that had been brought against hospitals covered by Continental policies. Several years later, Continental turned to its reinsurers to get reimbursement. The reinsurers refused to pay.

Continental sued the reinsurers in the United States District Court for the Southern District of New York (Leonard B. Sand, Judge ). After some procedural skirmishing, the reinsurers asserted a statute of limitations defense, posing a deceptively simple question: Under New York law, when does a cause of action for indemnity promised in a reinsurance policy accrue?

The reinsurers argued that Continental's cause of action accrued the day it made payment on its underlying insurance policies, because at that moment it became entitled to indemnity. Even if the reinsurance policies required that Continental make a demand for payment as a precondition to liability under the reinsurance policies, the cause of action accrued when Continental was entitled to make the demand, and that would still be the day it made payments on the underlying policies. Cf. N.Y.Civ.Prac.L. & R. 206(a) (McKinney 1990) ("CPLR 206(a)").

Continental countered that its cause of action could not accrue until the reinsurers "breached" the reinsurance policies by refusing to indemnify Continental for its payments. It brushed aside CPLR 206(a), noting that section 206(a) applies only to "procedural" demands (e.g., the demand upon the Board of Directors as a condition to bringing a shareholder derivative action) and not to cases when a demand and refusal are a substantive element of a cause of action, (e.g., a demand upon a bailee to return a chattel as a condition to making the bailee liable as a tortfeasor). Continental's view was that the reinsurers were not in breach of their contracts until Continental made an actual demand for reimbursement and was rebuffed by the reinsurers. The district court sided with Continental on both counts in a published opinion, Continental Cas. Co. v. Stronghold Ins. Co., 866 F.Supp. 143 (S.D.N.Y.1994), and thereafter entered judgment against the reinsurers.

On appeal, the parties renew the same basic arguments. We hold that the causes of action accrued when the reinsured notified the reinsurers of its losses under the reinsurance policies and the reinsurers subsequently denied coverage.

I.

The facts are undisputed, and are fully set forth in the district court's opinion. See id. at 144-45. We will summarize them briefly.

In the 1960's, the reinsurers issued reinsurance policies to Continental. The policies reinsured several medical malpractice insurance policies that Continental had issued to hospitals and hospital associations. Each reinsurance policy expressly required Continental to report to the reinsurers any losses "as soon as practicable."

In the 1980's, Continental settled several claims made upon its malpractice insurance policies. Some time later (the record does not say when), it notified the reinsurers of these settlements, and demanded that they pay their share. On various dates between 1987 and 1990, the reinsurers refused to pay, consistently denying liability under the reinsurance policies.

In November 1991, more than six years after it settled the last of the claims on the underlying policies, Continental sued the reinsurers, alleging that the reinsurers breached the various reinsurance policies by refusing its demands for payment. The reinsurers denied most of Continental's allegations, but, more importantly, asserted as an affirmative defense that Continental itself breached the reinsurance policies by giving the reinsurers late notice of the settlements.

In an unrelated case, the New York Court of Appeals handed down a decision undermining the reinsurers' late notice defense. Unigard Sec. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576, 584 N.Y.S.2d 290, 594 N.E.2d 571 (1992). This led the parties to enter into a conditional stipulation: the reinsurers would move in the district court for summary judgment dismissing the claims on statute of limitations grounds; in exchange they waived all other defenses. The agreement provided that if the district court ruled the claims time-barred, judgment would be entered for the reinsurers. On the other hand, if the district court ruled that the claims were timely, and that ruling was affirmed on appeal, the reinsurers would pay certain amounts under the policies.

As stipulated, the reinsurers moved for summary judgment on their statute of limitations defense. The parties agreed that: (1) New York law controlled; (2) New York's six-year statute of limitations applied; (3) Continental satisfied all conditions of the reinsurance policies; (4) Continental had paid its insureds more than six years before suing the reinsurers; but (5) Continental commenced suit within six years of the reinsurers' earliest denial of its demands for indemnity. Opposing the motion, Continental submitted a copy of the basic terms of one of the reinsurance policies; the contents of the policy were not disputed.

The district court denied the reinsurers' motion. Continental Cas. Co., 866 F.Supp. at 145-47. Reasoning that ordinary contract principles applied in determining when Continental's claims accrued, id. at 145, the district court held that no breach of the reinsurance policies occurred until the reinsurers refused Continental's request for reimbursement, id. at 145-46. Because this happened well within the six-year limitations period governing contract claims, N.Y.Civ.Prac.L. & R. 213(2) (1990), Continental's claims were timely as a matter of law. Id. at 146.

By this time, three of the reinsurers were mired in insolvency proceedings in English courts, resulting in a stay of Continental's suit as to those three. The remaining reinsurers moved for entry of a final judgment pursuant to Federal Rule 54(b). Finding that there was "no just reason for delay," Fed.R.Civ.P. 54(b), the district court granted the reinsurers' motion and entered a final judgment against the solvent reinsurers in the amounts stipulated under the settlement agreement. This appeal followed.

II.

On appeal, the reinsurers argue that the six-year period of limitations began to run when Continental settled and paid the malpractice claims covered by the underlying insurance policies. Since this occurred more than six years before Continental brought suit, the reinsurers conclude that the actions are time-barred. Continental counters, and the district court agreed, that the limitations period did not begin to run until the reinsurers breached the reinsurance policies, and that was when Continental's demand for indemnity was rejected.

It is an elementary principle of New York law that the statute of limitations "begins to run once a cause of action accrues." Aetna Life & Cas. Co. v. Nelson, 67 N.Y.2d 169, 175, 501 N.Y.S.2d 313, 316, 492 N.E.2d 386, 389 (1986); see N.Y.Civ.Prac.L. & R. 203(a) ("[t]he time within which an action must be commenced ... shall be computed from the time the cause of action accrued"). Reinsurance policies are express contracts for indemnity against loss. See, e.g., In re Midland Ins. Co., 79 N.Y.2d 253, 258, 582 N.Y.S.2d 58, 60, 590 N.E.2d 1186, 1188 (1992) ("A reinsurance contract is one in which a reinsurer agrees to indemnify a primary insurer for losses it pays to its policyholders."); see also Restatement of Security § 82 cmt. 1 (1941) ("indemnity is synonymous with insurance"). As such, the claim generally accrues when the indemnitee actually suffers a loss. See Steen v. Niagara Fire Ins. Co., 89 N.Y. 315, 325 (1882) (generally, the statute of limitations "begin[s] to run upon a contract of indemnity[ ] from the time...