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Insert Kissing Cousins Or Distant Relations?REPRINT
A close analysis of the Court's decision in American Home, however, reveals some possible flaws in the Court's reasoning which lead to the possibility that either the Unigard decision was wrong or the recent decision in American Home is wrong. The decision in American Home, of course, must be greeted with relief in the insurance community at large because any decision that reinforces the New York no prejudice rule in direct insurance must be considered a positive development. Since the majority of states require a showing of prejudice by insurers in order to sustain a late notice defense, New York is considered one of the few remaining bastions of a pro-insurer prejudice per se late notice rule. The decision in the intermediate appellate court adopting the Unigard rule for excess insurers suggested that even in New York the no prejudice rule for direct insurers was vulnerable and could ultimately be overturned in the foreseeable future. For reinsurers, of course, the American Home decision is simply a reiteration of the landmark decision in Unigard that distinguished insurance from reinsurance for late notice purposes and made it much more difficult, if not virtually impossible, for reinsurers to prevail on a late notice defense. For the Unigard decision clearly represented a severe dilution of reinsurers' "right to associate" provision found in many U.S. facultative reinsurance certificates. This commentary revisits Unigard on late notice and critically examines the American Home decision involving late notice to excess insurers and its relationship to Unigard. In Unigard the Court held that "[t]here are significant and basic differences between primary insurance and reinsurance."3 The Court continued: These differences in the contractual undertakings of reinsurers and primary insurers have consequences of critical importance, as courts in other jurisdictions have found. [CITE OMITTED] A reinsurer is not responsible for providing a defense, for investigating the claim or for attempting to get control of the claim in order to effect an early settlement. Unlike a primary insurer, it may not be held liable to the insured for a breach of these duties. Settlements, as well as the investigation and defense of claims, are the sole responsibility of the primary insurer; settlements made by the primary insurer are, by express terms of the reinsurance certificate, binding on the reinsurer. Thus, failure to give the required notice is of substantially less significance for a reinsurer than for a primary insurer.4 The court in Unigard, in discussing the difference between reinsurance and insurance, apparently used the term "primary" insurance to refer to any layer of direct insurance and did not distinguish between primary or first dollar insurance and excess insurance although the reinsurer in Unigard had reinsured an excess policy attaching excess of $75,000,000 excess of primary coverage.5 In fact, the high layer excess policy that was reinsured in Unigard had no duty to defend the insured against third-party claims; the insured, Owens-Corning Fiberglas, had retained the right to defend itself, and had defended those asbestos claims against it for many years prior to invasion of the excess policy. While the excess insurer in Unigard had a right to associate with the insured or underlying insurers in the defense of claims, it never defended any Owens-Corning asbestos claims. Indeed, all that the Court said in Unigard, about the rights of reinsurers could have been applied to the rights of the following form excess insurer that was reinsured. Thus, many of the factors by which the Unigard court distinguished insurance from reinsurance did not apply to the excess policy at issue in Unigard. In fact, the following form excess policy in Unigard was quite similar to the facultative certificate that reinsured it. Indeed, the high layer excess policy reinsured in Unigard probably had more in common with the facultative certificate that reinsured it than with the primary and first layer umbrella policies that lay underneath it. Similar terms and conditions included the notice of loss and right to associate provisions and the absence of a duty to defend.6 The New York Court of Appeals in American Home ratified and reaffirmed the purported differences between excess insurance and reinsurance that it found in Unigard and confirmed that primary insurers and excess insurers have the same need for prompt notice of loss. It can be argued, however, from the various notice provisions in the relevant policies that there are important differences between primary and first layer excess policies on the one hand and high layer excess policies on the other hand. These differences suggest that when late notice is concerned, not all direct insurers are equal. The underlying claim that give rise to this dispute arose out of the death of a family of five in an Alabama home caused by carbon monoxide poisoning. The gas originated from a furnace that had been serviced by Mobile Gas Company. Mobile had purchased three layers of liability coverage consisting of a $300,000 Liberty Mutual primary policy, a $5,000,000 American Home excess policy and a second excess layer of $10,000,000 with seven insurers participating. American Home was responsible for 40 percent of the second excess layer, defendant National Casualty Company participated for 10 percent and defendant International Insurance Company participated for 5 percent of the second excess layer.7 Liberty Mutual, as the primary insurer, investigated the claim promptly and acknowledged the lack of any viable defense to the underlying claim and agreed to contribute its entire policy limit to any settlement. The insured's attorney then advised American Home of the status of the lawsuit.8 Without notifying the other second layer excess insurers, American Home attempted to settle the wrongful death claim for $5,300,000, the full amount of the primary and first layer excess coverage. Only after this effort proved unsuccessful, American Home notified the other second layer excess insurers of the status of the claim and advised them that plaintiffs' estate was seeking $12,200,000 in settlement. American Home later contacted the other excess insurers to advise of its intention to offer up to $12,500,000 in settlement, an amount that would clearly require a contribution from those insurers. Ultimately, American Home was able to settle the claim for $11,500,000, which was $6,200,000 more than was available under the primary and first layer excess policies. Four second layer excess insurers refused to contribute their proportional shares of the $6,200,000 arguing that they had not been given timely notice under their policies. American Home then brought separate state court actions against two of the other excess insurers and brought actions against the other two disclaiming excess insurers that were ultimately removed to federal court.9 In April 1992, the federal district court held that the second layer excess insurers had a valid basis for disclaiming coverage based on late notice and rejected American Home's contention that the excess insurers could not disclaim for late notice in the absence of proving prejudice.10 After the federal district court decision, the defendant excess insurers in the state court action moved for summary judgment dismissing the complaints against them, arguing that American Home was collaterally estopped from arguing that they had received timely notice or that they had to show actual prejudice. The trial court in both state court actions adopted the collateral estoppel argument and granted their motions for summary judgment. On appeal, the Appellate Division reversed and denied defendants' motions for summary judgment and reinstated the complaints against them, holding that the analysis applied in Unigard to reinsurers should control the rights and obligations of excess insurers because of the similarity of the excess carriers' roles and the role of the reinsurer in Unigard.11 What becomes apparent upon reading the American Home decision is that many of the Court's pronouncements on excess insurers' need for prompt notice could apply as well to reinsurers, especially because the relevant terms and conditions of the excess policies at issue in American Home also bear a striking similarity to the notice of loss provisions and the right to associate provisions found in the facultative certificate construed by the Court in Unigard12 In criticizing the Appellate Division the Court held: [This analysis] overlooks the important function of prompt notice in furnishing even an excess carrier with an opportunity to participate in settlement discussions at a time when its input is most likely to be meaningful [cites omitted] Even if defendants had opted to forgo independent investigations, they certainly would have insisted on having a role in the discussions and decisions that led to a settlement which penetrated the second layer of excess coverage and thereby triggered their policy obligations.... As the other second level excess carriers were shut out of the process at the outset, there is no way of knowing what the outcome would have been if defendants' voices had been heard at an early stage in the decision-making process.13 The Court then stated that the Appellate Division impermissibly substituted its judgment for that of the excess insurer "which -- unlike the reinsurer in Unigard -- had a bargained for contractual right to decide for itself whether and how extensively to investigate."14 Thus, the Court again dismissed reinsurers' right to associate which is often based on the same contractual language that appears in many excess policies, including the excess policy involved in Unigard and the excess policies involved in American Home. Of course, the excess insurers' right to investigate that the court deemed so important reads very much like the reinsurers' right to associate in Unigard. Indeed, the Court's pronouncements in American Home regarding excess insurers insisting on "having a role in the discussions and decisions that led to a settlement," and being "shut out of the [settlement] process at the outset," and that there is "no way of knowing what the outcome would have been if defendant's voices had been heard at that early stage in the decision-making process," sound very much like the arguments made by the reinsurer in Unigard, which arguments fell on deaf ears. Indeed, it seems that the Court might have been oversimplifying when it stated that "it is apparent that excess insurers have little in common with reinsurers and, in fact, have the same interests that led us to conclude in Security Mutual Insurance Co. v. Aeker Fitzsimmons [cite omitted], that prompt notice to primary insurers is a condition precedent to coverage."15 Certainly, reinsurers have many of the same rights as excess insurers. The only significant difference between excess insurers and facultative reinsurers for notice purposes, to which the Court correctly pointed, was that "excess policies do not contain the follow the fortunes clauses that typify reinsurance contracts and leave reinsurers "little room to dispute the reinsurance conduct of the case."16 Thus, arguably either the Court of Appeals was wrong in Unigard to distinguish between insurance and reinsurance or was wrong in American Home not to distinguish between primary insurance and excess insurance. The fact is that there are important qualitative differences between the contractual obligations of primary insurers and many excess insurers. Excess insurers, especially high layer excess insurers, often do not have a duty to defend their insureds. Some excess policies provide coverage for defense costs supplemental to the limits but other excess policies pay defense costs only within policy limits. Still other excess policies exclude defense costs completely or provide coverage for defense costs only if incurred with the consent of the excess insurer. In contrast, nearly all primary liability policies (and many first layer excess umbrella policies) have a duty to defend and pay defense costs in addition to policy limits. Thus, where excess insurers do not have a duty to defend (even where they might provide coverage for defense costs), it could be argued that they have much less need for prompt notice of loss. Furthermore, where excess insurers do not have a duty to defend, they may nevertheless have a "right to associate" similar or identical to the "right to associate" found in reinsurance certificates such as the one construed by the Court in Unigard. This was the case with defendants' excess policies in American Home. While in Unigard the Court dismissed the reinsurer's "right to associate," in American Home an excess insurers' "right to associate" was given a far higher priority. The holding in American Home implicitly concedes that the excess insurers did not have the right to control the defense and settlement of the claim but merely had a "right to be heard" in the decision-making process. In the same fashion that the excess insurers argued that there was no way of knowing what the outcome would have been if their views had been heard at an earlier stage of the decision-making process, reinsurers often make the same argument, although they do not have the right to control defense or settlement of the underlying claims. Indeed, if one compares the language of the facultative certificate construed in Unigard with the excess policies construed in American Home one would be hard pressed to understand the Court's holding in American Home that "it is apparent that excess insurers have little in common with reinsurers and, in fact, have the same interests that led us to conclude... that prompt notice to primary insurers is a condition precedent to coverage."17 When the Court held that "excess insurers have most of the rights and obligations of primary insurers, they have the right to investigate claims and do participate in settlement negotiations and they have even been held to be entitled to make their own settlement determinations,"18 the Court could have been talking about facultative reinsurers. The Court in American Home concluded by saying that "although their relative stakes may have been small, defendants were entitled to the fair opportunity to protect themselves that timely notice affords."19 Certainly much the same could be said about reinsurers with contractual provisions almost identical to the excess insurers in American Home. In the end the only really significant difference between excess insurers and reinsurers is the obligation of reinsurers to "follow the settlements" of their cedents. But excess insurers are, in effect, obligated to "follow the settlements" of underlying insurers that result in exhaustion of underlying limits. It is only enforcement of their "right to associate" that allows them to influence, but not control, the defense and settlement of claims that may ultimately result in penetration of their excess layers. Reinsurers who use virtually the same contract language arguably should be entitled to the same rules of enforcement. One of the few rays of light for reinsurers was found in a recent decision in Cook County, Illinois where a no prejudice rule for direct insurance also still prevails. The Court held, after finding that notice was late, that "the prejudice is obvious. [The cedant's] action prevented [the Reinsurer] from taking any action to satisfy the legitimate Chakos claims before a $9,500,000 verdict was returned by a jury. As Unigard makes clear -- the primary insurer may do the investigation of a claim but the Reinsurer always has a right to associate its own counsel in that defense. It can hardly do so, however, if it is never informed of facts clearly demonstrating its interests are at risk."20 Hence, one trial court in Illinois found the reinsurer's right to associate to be worth quite a bit more than did the New York Court of Appeals. Thus, in an important jurisdiction like New York late notice as a defense for reinsurers will continue to be problematic unless reinsurers were to achieve a dramatic change in contract language that would eliminate the need to prove prejudice. ENDNOTES 1 90 N.Y.2d 433, 661 N.Y.S. 2d 504 (1997). 2 79 N.Y.2d 576, 584 N.Y.S.2d 290. There are three reported decisions arising from the same dispute. The federal district court decision which followed a nine-day bench trial, 762 F. Supp. 566 (S.D-N.Y. 1991), the New York Court of Appeals decision cited here which resulted from a question certified by the Second Circuit for appeal to the New York Court of Appeals, and the Second Circuit's decision following the New York Court of Appeals' resolution of the certified question, 4 F.3d 1049 (2d Cir.). 3 79 N.Y.2d 582, 584 N.Y.S.2d 293. 4 79 N.Y.2d 583, 594 N.Y.S. 2d 290. 5 79 N.Y.2d 579, 584 N.Y.S. 2d 291. In American Home the Court implicitly acknowledged its loose use of the term "primary insurance." 90 N.Y.2d 587, 661 N.Y.S. 2d 587, n.2. 6 The excess policy involved in Unigard provided, under "Notice of Loss" (this policy provision is not found in the reported decision but was contained in the Record on Appeal): The Insured shall immediately advise the Company of any accident or occurrence which appears likely to result in liability under this Certificate and of subsequent developments likely to affect the Company's liability hereunder. At no time shall the Company be called upon to assume charge of the settlement or defense of any claims made or suits brought or proceedings instituted against the Insured, but the Company shall have the right and shall be given the opportunity to associate with the Insured or its underlying Insurer or Insurers, or both, in the control, defense and/or trial of any claims, suits or proceedings which, in the opinion of the Company, involves or appears reasonably likely to involve the Company. If the Company avails itself of such right and opportunity, the Insured, and underlying Insurer or Insurers and the Company shall cooperate in the control, defense and/or trial of such claims, suits or proceedings, so as to affect a final determination thereof. Failure on the part of the Insured or the underlying Insurer or Insurers to cooperate shall relieve the Company, at its option, of liability under the Certificate. 7 90 N.Y.2d 438, 661 N.Y.S.2d 584. 8 Id. 9 Id. 10 American Home Assur., Co. v. Republic Ins. Co., 788 F. Supp. 214, 216, aff'd, 984 F.2d 76 cert. denied 508 U.S. 973, 113 S. Ct. 2964, 1251, Ed. 2d 664. 11 American Home Assur. Co. v. International Insurance Co., 219 A.D.2d 143, 641 N.Y.S.2d 241; American Home Assur. Co., v. National Cas. Co., 227 A.D.2d 160, 642 N.Y.S.2d 506. 12 The facultative certificate involved in Unigard provided, in its notice of loss provision, as follows: 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. 79 N.Y.2d 579, 584 N.Y.S.2d 291. Under the International Insurance Company excess policy, the insured "was obligated to give notice" as soon as practicable, upon its becoming aware of the "happening of an occurrence reasonably likely to involve [international]" and the Policy further provided that International bad "the right and opportunity to associate with the Insured in the defense and control of any claim or proceeding reasonably likely to involve the Company. In such event, the Insured and the Company shall cooperate fully." The excess policy of defendant National Casualty Company provided under "Notice of Occurrence" as follows: Written notice of any accident or occurrence whether or not it appears likely to involve this Policy, shall immediately be given by or on behalf of the Insured to the Company, which at its own option, may participate in the investigation, settlement of any defense, claim or suit. The excess policy of United National, another of the second layer excess insurers provided: Notice of Occurrence which appears likely to involve this Policy shall be given by or on behalf of the Insured to the Company or any of its authorized agents as soon as practicable. The Company at its own option may, but is not required to, participate in the investigation, settlement or defense of any claim or suit against the Insured. These policy provisions can be found in the briefs and in the Record on Appeal. 13 90 N.Y.2d 433, 441-42; 661 N.Y.S.2d 587-88. 14 90 N.Y.2d 442, 661 N.Y.S.2d 588. 15 90 N.Y.2d 442-43, 661 N.Y.S.2d 588. 16 90 N.Y.2d 443, 661 N.Y.S.2d 588. 17 90 N.Y.2d 442, 661 N.Y.S.2d 588. 18 90 N.Y.2d 443, 661 N.Y.S.2d 588. 19 Id. 20 Casually Insurance Co. v. Constitution Reinsurance Corp., et, a., No. 91L14732, Ill. Cir. Ct., Cook Co., January 22, 1996. [Editor's Note; Mr. Goldstein is a partner at Mound Cotton Wollan & Greengrass in New York specializing in insurance and reinsurance litigation and arbitration. This commentary does not represent the views of the firm or its clients. Responses are welcome. Copyright 1997, Mr. Goldstein.]
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