(Article from Insurance Law Alert, September 2025)
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Holding
A ceding insurer’s delay in providing notice to a reinsurer was objectively unreasonable and material, and therefore the reinsurer had no duty to indemnify the underlying claims. United States Fire Ins. Co. v. Unified Life Ins. Co., 2025 U.S. App. LEXIS 20768 (5th Cir. Aug. 14, 2025).
Background
In April 2017, a claimant sued Unified Life, alleging that the insurer underestimated the “reasonable and customary” medical charges for which it would provide reimbursement. The complaint also asserted that Unified Life used a software program to systematically over-discount claims, an allegation that prompted the claimant to later move for class certification.
In September 2019, a Montana district court granted partial summary judgment for the claimant on his individual breach of contract claim and also granted the motion for class certification.
In December 2019, Unified Life notified U.S. Fire, its reinsurer, of the litigation. U.S. Fire responded by advising it of late notice and recommending that Unified Life move for reconsideration, among other things, which the district court denied in March 2021.
In July 2021, Unified Life told U.S. Fire that it had reached a settlement and in October 2021, Unified Life established an $8 million class fund, of which $2 million was allocated for class counsel’s attorneys’ fees.
In April 2022, U.S. Fire sued Unified Life, seeking a declaration that Unified Life’s notice of the underlying litigation was untimely and prejudicial and that U.S. Fire was not obligated to provide indemnity. Unified Life countersued, seeking a declaratory judgment confirming its compliance with the treaty and right to indemnification. Ruling on cross-motions for summary judgment, a Texas district court granted Unified Life’s motion and denied U.S. Fire’s motion, reasoning that prompt notice under the treaty was triggered only when Unified Life subjectively realized that the underlying litigation might require indemnification from U.S. Fire. The district court further held that because there was no evidence of Unified Life’s subjective intent, U.S. Fire could not prevail on the late notice issue. The Fifth Circuit reversed.
Decision
The reinsurance treaty requires Unified Life to give prompt notice “of all Claims which, in the opinion of [Unified], may result in a claim hereunder.” The central issue in dispute was whether this provision embodies an objectively reasonable standard or a subjective standard based on Unified Life’s actual beliefs.
The court concluded that notwithstanding the “in the opinion of Unified” verbiage, the language requires a standard of objective reasonableness. The court noted that in the reinsurance context, an objective standard is “customary” and best aligns with the treaty as a whole. In particular, the court emphasized that notice in a quota share treaty enables the reinsurer to assess its financial exposure and participate in the defense, stating:
U.S. Fire agreed to indemnify 25 percent of all Unified’s loss on covered claims, beginning with the first dollar of loss. Because of first dollar loss exposure, U.S. Fire became liable not only for the ultimate outcome of disputed claims, but for meaningful litigation expenses at an early stage in their handling. As an experienced participant in the field of medical insurance, U.S. Fire was equipped, when afforded prompt notice, to assist in clam defense notwithstanding Unified’s principal responsibility. Both Unified and U.S. Fire had skin in the game from the outset of litigation.
In predicting that the Texas Supreme Court would endorse an objective standard, the Fifth Circuit noted that other jurisdictions have “almost uniformly” applied an objective standard, even when the reinsurance treaty includes “in the opinion or judgment of” language. Additionally, the court emphasized the dangers of applying a purely subjective standard, which would allow a ceding insurer to “plead[ ] ignorance or error” and thereby “nullify the notice requirement.”
Applying this objective standard, the court concluded that Unified Life breached the treaty by providing notice that was unreasonably late as a matter of law. The court noted that at several key points in the underlying litigation (including the class action certification and the Ninth Circuit’s denial of appellate review), a reasonable reinsured would have realized its obligation to provide notice.
Finally, the court ruled that the late notice was a material breach that resulted in prejudice to U.S. Fire as a matter of law. The court reasoned that the delayed notice deprived U.S. Fire of its ability to assist in the underlying defense, particularly after the issuance of an adverse summary judgment ruling. The court further observed that late notice also weakened Unified Life’s and U.S. Fire’s position in the settlement negotiations.
Comments
The decision highlights the relevance of the parties’ sophistication in interpreting contract provisions. The court stated: “The sophisticated parties to this agreement had to assume that ‘the opinion of’ Unified, even if ‘subjective,’ would be grounded in its professional experience and familiarity with potential claims. Objective reality, in other words, was implicit in Unified’s opinion.”
The court noted U.S. Fire’s expertise in short-term medical insurance (as well as Unified Life’s lack of experience in this arena), stating that “Unified contracted with U.S. Fire because of ‘its experience in reinsuring other health insurers and writing direct health insurance itself.’ This context heightened the importance of U.S. Fire’s right to associate pursuant to the Treaty.”