(Article from Insurance Law Alert, July/August 2016)
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A New York trial court addressed arguments relating to late notice, warranty of retention and follow the fortunes in a reinsurance coverage dispute. Granite State Ins. Co. v. Clearwater Ins. Co., No. 653546/11 (N.Y. Sup. Ct. New York Cnty. June 17, 2016).
Granite State issued an excess policy to Kaiser Aluminum. The policy was reinsured by Clearwater. When Kaiser was sued in thousands of personal injury asbestos-related suits, litigation between Kaiser and various insurers ensued. Granite State ultimately reached a policy-limits settlement with Kaiser, and Kaiser filed for Chapter 11 protection. Four years after a bankruptcy court approved the settlement, Granite State billed reinsurer Clearwater for the loss. Clearwater refused to pay, arguing that the Granite State knew that the underlying policy limits would be reached years before it notified Clearwater, and that Granite State’s delay in providing notice violated the reinsurance certificate and substantially prejudiced Clearwater. A New York trial court ruled in Granite State’s favor on the late notice defense, and issued several other rulings relating to interpretation of Clearwater’s reinsurance certificate.
First, the court held that Clearwater did not waive its right to assert late notice notwithstanding a two-year delay in denying coverage on that basis. The court reasoned that there was no evidence of misconduct on Clearwater’s part, and that Granite State failed to establish detrimental reliance based on the delay.
Second, the court found an actual conflict between New York and California law as to whether a reinsurer can obtain “constructive notice” of a potential claim. Under New York law, a cedent cannot contend that its reinsurer obtained knowledge of a claim through collateral sources, whereas California law permits such constructive notice. Applying California law (based on a “significant contacts” analysis), the court held that the record did not support a showing of constructive notice to Clearwater. Although certain documents evidenced Granite State’s possible involvement in litigation, the court agreed with Clearwater that “[p]roviding general information about an underlying policyholder, and hoping that the reinsurer ‘figures it out,’ is not what the [Certificate] notice provision requires.”
Third, the court held that California law requires a showing of “actual and substantial” prejudice stemming from late notice and that Clearwater failed to make such showing. Clearwater argued that it had reached a commutation agreement with a retrocessionaire, which it would not have entered had it known about the Kaiser reinsurance claim. Relying on Ninth Circuit precedent, the court concluded that the commutation agreement was a “collateral matter” that did not establish prejudice.
Fourth, the court rejected Clearwater’s exhaustion argument – i.e., that Granite State did not “actually pay” settlement amounts to Kaiser, as required by the certificates, because payment was made by related entities rather than Granite State itself. The court deemed this argument “overly simplistic” and ruled that Clearwater’s obligations were triggered by virtue of the fact that payments were made up to the limits of Granite’s State’s underlying policy, regardless of the source of payments.
Fifth, the court ruled that a factual issue existed as to whether Granite State’s pooling agreement with other companies, under which all of Granite State’s liability was transferred violated the “warranty of retention” provision in the reinsurance certificate. The warranty of retention clause required Granite State to “retain for its own account, subject to treaty insurance only, if any, the amount specified on the face of th[e] Certificate.” The court explained that under California law, evidence of custom and usage can establish a latent ambiguity in otherwise facially unambiguous policy language. The court concluded that an ambiguity existed here because an expert testified that an inter-company pooling agreement among affiliates is not typically considered a violation of a retention warranty.
Finally, the court ruled that Clearwater was entitled to challenge Granite State’s allocation of insurance proceeds to underlying claims. In so ruling, the court held that a reinsurance provision which states that Clearwater’s liability “shall follow [Granite State’s] liability in accordance with the terms and conditions of the policy reinsured hereunder,” was a “follow form” clause, and not a follow the fortunes provision. Although other courts have reached a contrary conclusion when faced with similar language, the
Granite State court “beg[ged] to differ.”