AXA Versicherung AG, v. New Hampshire Insurance Co. et. al.
(United States Court of Appeals, Second Circuit, August 23, 2010)
In this reinsurance matter, AIG appealed from a judgment entered in the Southern District of New York after a jury trial concluded AIG was liable for $34 million, including $5.7 million in punitive damages on claims of fraudulent inducement with respect to two reinsurance facilities. The court of appeals affirmed the district court’s conclusion that all of AXA’s allegations sounded in fraud and thus were not arbitrable, but vacated the judgment holding AIG liable for $34 million because AXA’s fraudulent inducement claims were barred by the statute of limitations.
Specifically, the court of appeals agreed that all of the allegations sounded in fraud, noting that while AIG performed under the reinsurance contracts, it misrepresented to AXA precisely how the reinsurance facilities would operate from their inception. The court determined that AIG misrepresented that it would treat the facilities as facultative obligatory, cede a reasonable cross-section of the risk, and that AXA’s share of the primary layer risks would be calculated as a percentage of AIG’s share when, in fact, AIG did not intend to retain any primary layer risks, thereby fraudulently inducing AXA to enter in the reinsurance contacts. Specifically, the court stated “the crux of AXA’s claims was that AIG … misled AXA into believing that the reinsurance facilities operated on a facultative obligatory basis, while AIG treated them as purely facultative and offloaded bad risks on the reinsurers…."
Notwithstanding the inducement, the court of appeals reviewed de novo, finding the fraudulent inducement claims were time-barred, as AXA was placed on “inquiry notice” more than two years before suit was filed. Specifically, the court concluded that wordings signed more than seven years before suit was filed clearly indicated that the facilities were facultative in nature and AXA could not have reasonably relied on AIG’s continued misrepresentations regarding the nature of the facilities. Thus, the court held that AXA was confronted with a clear “storm warning” well before the suit was filed, as well as additional facts through 2000 suggesting it had been defrauded, thereby triggering a duty of inquiry. AXA’s failure to engage in that inquiry imputed to it knowledge of the alleged fraud and rendered its fraudulent inducement claims time-barred.
Moreover, the court noted that AXA’s failure to carefully read the wordings, which clearly indicated that the facilities were facultative in nature, was unreasonable and “legally irrelevant.” Thus, because AXA’s own factual allegations constituted a storm warning that AXA ignored by failing to fully read the wordings it signed, AXA’s claims were time-barred.
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Paul Steck and Jeffrey Kingsley