On March 25, Judge Sidney H. Stein, of the USDC for the Southern District of New York, agreed with a magistrate report and recommendation and granted summary judgment to a reinsurer, ruling that the reinsurer did not have to show prejudice when denying coverage because of an insurer’s late notice of a claim. Foster Wheeler, a company that used asbestos in its products, was insured by Liberty Mutual Insurance Co. AIU Insurance Co. issued excess insurance policies that covered certain losses beyond the limits of Foster Wheeler’s primary coverage by Liberty. AIU reinsured a number of its policies with International Insurance Co., a predecessor of TIG Insurance Co.
Foster Wheeler became involved with numerous asbestos-related personal injury claims. Liberty Mutual settled the claims, and the primary coverage was exhausted. AIU and certain of its affiliates entered into a settlement agreement with Foster Wheeler, and AIU claims that it made payments to Foster Wheeler and submitted reinsurance billings to TIG, but TIG failed to make payment on the billings.
AIU brought suit against TIG in August of 2007 to recover the unpaid reinsurance billings. AIU brought a claim for breach of contract and asked the court for a declaration concerning TIG’s liability under the reinsurance agreements. TIG moved and AIU cross-moved for summary judgment. The magistrate report concluded that AIU breached the reinsurance certificates by providing late notice of the Foster Wheeler claim.
In his opinion and order, Judge Stein noted that AIU waited for more than three years before notifying TIG of its claim. According to Judge Stein, “although AIU had received a demand letter from Foster Wheeler in October 2003, AIU did not notify TIG that a claim had been made against AIU until January 2007.” Furthermore, the reinsurance agreements did not contain choice of law provisions, which led to a fight over whether Illinois or New York law controlled. Judge Stein noted that under Illinois law, prejudice does not have to be shown by the reinsurer before the reinsurer can deny a claim. On the contrary, in New York – where AIU’s principal place of business is located – the law requires that the reinsurer not only late notice, but also that the reinsurer suffered prejudice as a result of the late notice. The magistrate report concluded that Illinois law should apply, and recommended that the court grant TIG’s motion for summary judgment.
Where parties to a contract do not specify which state’s law should apply,New York courts fill this gap by employing an approach known as “grouping of contacts” or “center of gravity”. According to Judge Stein, the relevant contacts a court should consider principally include the place of contracting, negotiation, and performance; the location of the subject matter of the contract; and the domicile of the contracting parties. The judge agreed with the magistrate that the reinsurance agreements were issued in Illinois and AIU agreed to perform there, and determined that New York’s choice of law rules mandated the application of Illinois law to the reinsurance agreements. Thus, under Illinois law, a notice provision in a reinsurance contract was a condition precedent to recovery, notwithstanding the lack of clear language supporting that reading in the contract itself.