Fortress Re, Inc. v. Central Nat. Ins. Co. of Omaha, 84-1086

• Citation: 766 F.2d 163
• Decision Date: 03 July 1985
• Docket Number: No. 84-1086,84-1086
• Parties: FORTRESS RE, INC., Penn Re, Inc., Calvert Fire Insurance Company, Appellees, v. CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 163

766 F.2d 163

FORTRESS RE, INC., Penn Re, Inc., Calvert Fire Insurance Company, Appellees, v. CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, Appellant.

No. 84-1086.

United States Court of Appeals Fourth Circuit.

Argued Jan. 8, 1985.

Decided July 3, 1985.

R. Michael Strickland, Raleigh, N.C. (Joseph C. Moore, Jr., Randolph L. Worth, Young, Moore, Henderson & Alvis, P.A., Raleigh, N.C., on brief), for appellant.

H. Hugh Stevens, Jr., and William G. Pappas, Raleigh, N.C. (Sanford, Adams, McCullough & Beard, Raleigh, N.C., on brief), for appellees.

Before HALL and SNEEDEN, Circuit Judges, and BUTZNER, Senior Circuit judge.

BUTZNER, Senior Circuit Judge:

Fortress Re, Inc., Penn Re, Inc., and Calvert Fire Insurance Co. (collectively referred to as Fortress) sued Central National Insurance Co. seeking a declaratory judgment that Fortress was not obligated to Central under a contract of facultative reinsurance issued by it to Central. Central counterclaimed for reimbursement. The district court granted Fortress's motion for summary judgment. ^* Because we find that genuine issues of material fact remain unresolved, we vacate the judgment and remand the case for further proceedings.

I

On January 8, 1975, Fortress issued a reinsurance certificate agreeing to reimburse one-half of Central's liability over $250,000 under Central's policy issued to a manufacturer of swimming pools. Central's policy had an upper limit of $1,000,000. The reinsurance certificate provided that "[p]rompt notice shall be given to the Reinsurer by the Company of any occurrence or accident which appears likely to involve this reinsurance...."

On September 25, 1978, Central received notice of an action filed for personal injuries sustained in a pool manufactured by Central's insured. Central appointed an investigator and local defense counsel. Counsel reported that the claim was serious and that any excess insurance carriers should be notified. Although Central's investigator recommended establishing a $100,000 reserve, the company reserved only $20,000. In March of 1980, after discovery had proceeded on the claim, the investigator recommended increasing the reserve to between $100,000 and $200,000. An increase to $100,000 was approved.

By April, 1980, defense counsel informed Central that the possible liability exposure was great and that the proposed defenses were insufficient. The reserve was increased to $200,000. Central's internal memoranda in November, 1980, and July, 1981, indicate that it may have been aware of the necessity of providing notice to the reinsurers. In August, 1981, the law of New Jersey applicable to the claim changed to eliminate the primary defense relied on by Central's insured. Central's agent recommended increasing the reserve to $500,000, and the company approved. At this time, the claimant's attorneys were demanding $3,000,000.

By November, 1980, Central had an aggregate retained liability on the policy of approximately $200,000, representing other reserved and paid claims against the insured. Fortress contends that this plus the reserve on the pool claim was sufficient to invoke Central's obligation to give it proper notice.

On January 4, 1982, Central's agent discovered that the increased reserve had not been posted and that a clerical error had resulted in no notice to Fortress. This discovery occurred one week before a settlement conference and the trial. On January 6, 1982, three days before trial, Central telexed Fortress to provide notice of the claim and an invitation to participate in a settlement conference the next day.

Central also sent Fortress a detailed claim analysis. On January 6 Central received a telex from Fortress stating that Central's notice was not timely and that Fortress would file immediately for declaratory relief. Fortress's complaint was filed on January 8, 1982. On January 11, 1982, the claim against Central's insured was settled for $923,605.

Three issues are raised on appeal. First, whether North Carolina law applies. Second, whether the principles explained in Great American Insurance Co. v. C.G. Tate Construction Co., 303 N.C. 387, 279 S.E.2d 769 (1981) (Tate I ), are applicable to a reinsurance contract. Third, whether summary judgment was appropriate.

II

When sitting in a diversity action, the district court must apply the law of the forum, including its choice of law rules. Klaxon Co. v. Stentor Mfg., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). For reasons adequately stated by the district court, North Carolina law applies. See 595 F.Supp. at 337.

III

For many years, North Carolina followed the traditional contract rule that failure to comply strictly with a notice requirement was a failure to satisfy a condition precedent, releasing the insurer from its obligation to defend and indemnify. This rule has now been rejected. In Great American Insurance Co. v. C.G. Tate Construction Co., 303 N.C. 387, 279 S.E.2d 769 (1981) (Tate I ), the North Carolina Supreme Court expressly overruled its cases based on traditional contractual principles and held that the failure to give timely notice to the insurer does not relieve the insurer of its obligations unless the delay materially prejudices the insurer's ability to investigate and defend. 303 N.C. at 396, 279 S.E.2d at 774. The insured, however, must prove that its failure to give timely notice was in good faith. 303 N.C. at 399, 279 S.E.2d at 776. This new rule embraces the modern contract principle that although a notice requirement may be denominated a condition precedent, it "should be construed in accord with its purpose and with the reasonable expectations of the parties." 303 N.C. at 390, 279 S.E.2d at 771.

Although Tate I involved primary insurance, we believe that North Carolina would not adopt a different rule for reinsurance contracts. Reinsurance is an insurance contract having an insurance company as a policyholder. See 13A J.A. Appleman & J. Appleman, Insurance Law and Practice Sec. 7681 (1976). Counsel have not directed our attention to any cases that distinguish reinsurance from primary insurance with respect to notice. We cannot accept Fortress's contention that this case is governed by Fortress Re, Inc. v. Jefferson, 465 F.Supp. 333 (E.D.N.C.1978), aff'd, 628 F.2d 860 (4th Cir.1980). In Jefferson we applied the traditional primary insurance rule to a reinsurance contract and held that notice was a condition precedent. But in Tate I, 303 N.C. at 396, 279 S.E.2d at 774, the Supreme Court of North Carolina overruled the two state cases on which Jefferson was based. Moreover, the rejection of the state cases is unequivocal. The overruled cases and the traditional theory they had expressed were supplanted by new principles that are readily adaptable to reinsurance contracts. Consequently, we decline to carve an exception to the new principles explained in Tate I by applying the rationale of cases which the Supreme Court of North Carolina has expressly and unequivocally overruled. The district court properly held that the principles explained in Tate I are applicable to a reinsurance contract.

IV

There can be no doubt that Central did not give notice to Fortress as soon as practicable. The district court, therefore, answered the first part of the test prescribed by Tate I correctly.

The district court recognized that North Carolina courts had not yet addressed the meaning of the requirement of good faith. In the absence of guidance from the state courts, it rejected Central's contention that good faith was shown by the absence of...