Unigard Sec. Ins. Co., Inc. v. North River Ins. Co.

Decision Date05 May 1992
Citation594 N.E.2d 571,584 N.Y.S.2d 290,79 N.Y.2d 576
Parties, 594 N.E.2d 571, 60 USLW 2722 UNIGARD SECURITY INSURANCE COMPANY, INC., as Successor to Unigard Mutual Insurance Company, Inc., Plaintiff, v. NORTH RIVER INSURANCE COMPANY, Defendant.
CourtNew York Court of Appeals Court of Appeals
OPINION OF THE COURT

HANCOCK, Judge.

Under New York law, the standard provision in a contract of primary liability insurance requiring the insured to give the insurer prompt notice of a potential claim operates as a condition precedent; thus, for failure to give notice, the primary insurer "need not show prejudice before it can assert the defense of noncompliance" (Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440, 340 N.Y.S.2d 902, 293 N.E.2d 76). For reasons which follow, we hold that this "no prejudice" rule does not apply to a failure to comply with the prompt notice requirement in a contract of reinsurance.

I.

This appeal, pursuant to section 500.17 of this Court's Rules of Practice (22 NYCRR), certifies to us the central legal issue in a declaratory judgment action commenced in the United States District Court for the Southern District of New York by Unigard Security Insurance Company, Inc. (Unigard) against North River Insurance Company (North River). The question is whether Unigard must honor its commitment under a facultative reinsurance certificate 1 issued to North River covering a high layer excess insurance policy issued by North River to Owens-Corning Fiberglass Corp. (Owens-Corning) (see, Unigard Sec. Ins. Co. v. North Riv. Ins. Co., 762 F.Supp. 566 [S.D.N.Y., Sweet, J.].

Unigard contends that it is automatically relieved from its obligations under the reinsurance certificate because North River failed to give prompt notice of an "occurrence or accident which appear[ed] likely to involve [the] reinsurance" as required by clause C of the certificate. Any question of prejudice, it argues, is irrelevant. North River has filed a counterclaim seeking damages and a declaration that Unigard is obligated to pay under the certificate. North River maintains that before a reinsurer may avoid its responsibility on account of late notice, it must show that it has suffered prejudice and that, since concededly no prejudice has been shown, Unigard's defense of late notice must fail.

The North River policy--for which Unigard issued its certificate of reinsurance--provided $30 million in excess liability insurance for two successive policy periods for amounts recovered against Owens-Corning over $76 million of underlying primary and lower level excess policies provided by various insurers. Under its certificate, Unigard agreed "to reinsure" North River in respect to these policies "subject to the terms, conditions, limits of liability, and Certificate provisions set forth". The terms and provisions include the following:

"C. Prompt notice shall be given by the company to the Underwriting Managers on behalf of the Reinsurers of any occurrence or accident which appears likely to involve this reinsurance and while the Underwriting Managers or the Reinsurers do not undertake to investigate or defend claims or suits, the Underwriting Managers directly, or through its representatives and/or counsel, shall nevertheless have the right and be given the opportunity to associate with the Company and its representatives at the Reinsurers' expense in the defense and control of any claim, suit or proceeding which may involve this reinsurance with the full cooperation of the Company."

Unigard, as the agreed payment for its reinsurance commitment, became entitled to receive one sixth of the premium paid to North River, less the standard 25% brokerage commission.

The dispute over the Unigard reinsurance coverage stemmed from the asbestos claim crisis which began in the early 1980's and resulted in hundreds of claims against various asbestos products manufacturers including Owens-Corning. On April 1, 1987, North River became aware that its excess policies were being penetrated and that there was a likelihood that the Unigard reinsurance would be involved. In August 1987, North River sent a precautionary notice to Unigard advising it of potential asbestos-related losses under its excess policies. Unigard did not receive this notice until September 2, 1987.

The District Court, after a nine-day bench trial, found: (1) that North River's obligation to send a notice to Unigard arose in April 1987; and (2) that, under an objective standard, the notice sent in August and received on September 2, 1987 was untimely. It rejected Unigard's late notice defense, however, holding that New York law required a reinsurer to demonstrate prejudice. Because there was no showing of prejudice, the Court rendered judgment in favor of North River (762 F.Supp. 566, supra ).

On appeal to the Second Circuit Court of Appeals, 949 F.2d 630, that court determined: (1) that the only New York decision on the issue of whether a reinsurer is required to demonstrate prejudice is an unpublished opinion (General Ins. Co. v. Nutmeg Ins. Co., Sup.Ct., N.Y. County, July 24, 1987, Shainswit, J.); and (2) that there is a split of authority on the issue within the Southern District of New York (compare, Christiana Gen. Ins. Corp. v. Great Am. Ins. Co., 745 F.Supp. 150 [S.D.N.Y.1990] [holding that reinsurer must demonstrate prejudice to prevail on late-notice defense], appeal pending 979 F.2d 268 [2d Cir., 1992], with Travelers Ins. Co. v. Buffalo Reinsurance Co., 735 F.Supp. 492 [reinsurer need not prove prejudice], vacated in part 739 F.Supp. 209 [S.D.N.Y.1990].

The Second Circuit noted that the "determination of the legal requirements for the assertion of a late-notice claim in the reinsurance context is important to purchasers and sellers of reinsurance issued in New York and to the reinsurance industry" (949 F.2d 630, 632). Accordingly, it certified to us the following question:

"Must a reinsurer prove prejudice before it can successfully invoke the defense of late notice of loss by the reinsured?" (Id., at 632.)

We answer the question in the affirmative.

II.

It is settled New York law that the notice provision for a primary insurer operates as a condition precedent and that the insurer need not show prejudice to rely on the defense of late notice (see, Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440, 340 N.Y.S.2d 902, 293 N.E.2d 76, supra ). The question is whether this same rule should be applied in the context of reinsurance. The New York "no prejudice" rule for primary insurers--as remarked by the District Court herein (Unigard Sec. Ins. Co. v. North Riv. Ins. Co., supra, at 592)--is a limited exception to two established rules of contract law: (1) that ordinarily one seeking to escape the obligation to perform under a contract must demonstrate a material breach or prejudice (see, Restoration Realty Corp. v. Robero, 58 N.Y.2d 1089, 1091, 462 N.Y.S.2d 811, 449 N.E.2d 705; J.N.A. Realty Corp. v. Cross Bay Chelsea, 42 N.Y.2d 392, 395, 397 N.Y.S.2d 958, 366 N.E.2d 1313; American Power Indus. v. Rebel Realty Corp., 145 A.D.2d 454, 455, 535 N.Y.S.2d 99; Insurance Co. v. Associated Intl. Ins. Co., 922 F.2d 516, 523 [9th Cir.1990]; Toyomenka Pac. Petroleum v. Hess Oil Virgin Is. Corp., 771 F.Supp. 63, 68 [S.D.N.Y.]; 11 Williston, Contracts § 1292, at 8 [3d ed]; Restatement [Second] of Contracts § 237 [1979]; 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 ( see, Manning v. Michaels, 149 A.D.2d 897, 898, 540 N.Y.S.2d 583; F.H.R. Auto Sales v. Scutti, 144 A.D.2d 956, 534 N.Y.S.2d 266; Toyomenka Pac. Petroleum v. Hess Oil Virgin Is. Corp., supra, at 68; Insurance Co. v. Associated Intl. Ins. Co., supra, at 524; Security Mut. Cas. Co. v. Century Cas. Co., 531 F.2d 974, 976 [10th Cir.1976]; 22 N.Y.Jur.2d, Contracts, §§ 234, 237).

Various reasons have been expressed for the New York exception as applied to primary insurers: i.e., that "the insurer [must have] an opportunity to protect itself" (Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., supra, 31 N.Y.2d at 440, 340 N.Y.S.2d 902, 293 N.E.2d 76); that without timely notice, "an insurer may be deprived of the opportunity to investigate a claim and is rendered vulnerable to fraud" (Power Auth. v. Westinghouse Elec. Corp., 117 A.D.2d 336, 339, 502 N.Y.S.2d 420); and that late "notification may * * * prevent the insurer from providing a sufficient reserve fund" (id., at 339, 502 N.Y.S.2d 420; and see, Security Mut. Cas. Co. v. Century Cas. Co., 531 F.2d 974, 978, supra [prompt notice permits the primary insurer to make an early estimate of potential exposure, to investigate the claim while witnesses and facts are available, and to take steps to prevent fraud]; Commercial Union Ins. Co. v. International Flavors & Fragrances, 822 F.2d 267, 271 [2d Cir.1987] [early notice enables the insurer, inter alia, to exercise early control over the claim and enhances the possibility of settlement].

The question posed to us by the Circuit Court may be restated thus: do the same reasons for adopting the "no prejudice" exception to the general rules of contract for primary insurers apply to reinsurers? We believe they do not. We address this question, it must be noted, under the specific prompt notice provision contained in clause C of the North River certificate (supra, at 579-580, at 291-292 of 584 N.Y.S.2d, at 572-573 of 594 N.E.2d). There is nothing in this provision or...

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