Second Circuit Finds No Coverage Based on Late Notice Issue To a Reinsurer

The U.S. Court of Appeals for the Second Circuit affirmed a district court’s ruling that late notice, alone, was sufficient to defeat a cedent’s claim. In Granite State Insurance Co. v. Clearwater Insurance Co., No, 14-1494-cv, 2015 WL 1474605 (2d Cir. Apr. 2, 2015), the court was forced to determine whether Illinois law on late notice to a reinsurer was settled, or if it should instead apply New York’s prejudice requirement.

Granite State Insurance Company, the cedent, settled a large number of asbestos-related personal injury claims against the underlying insured. Upon seeking reimbursement from Clearwater Insurance Company, Clearwater refused to pay, alleging that Granite State failed to provide timely notice as required by the reinsurance certificates. Accordingly, Granite State filed suit, alleging that Clearwater wrongfully refused to pay its portion of the claims.

To start, the court summarily confirmed that notice was untimely and that Illinois had the most significant contacts with the coverage dispute. However, it followed with a choice of law question that served as the determining factor in the dispute. If the court decided that Illinois law was sufficiently settled, it would apply Illinois law. However, if it determined the question of law was unsettled, the court would apply New York law. The court noted that New York law is clear – late notice alone is insufficient to defeat a cedent’s claim. A reinsurer must also show prejudice. Illinois law, however, is not as well settled. The most relevant cases include a 1942 decision from the Seventh Circuit and two more recent trial court opinions, one state and one federal, which cite to the Seventh Circuit decision. Those cases find that a showing of prejudice to a reinsurer is not required under Illinois law.

The court resolved the issue with the assistance of a recent Second Circuit decision from 2014. There, and here, the court found that a New York court would find Illinois law settled. As such, a New York state court would “adhere to the consensus drawn” and not impose the prejudice requirement. Thus, the court affirmed summary judgment finding that late notice alone was sufficient for Clearwater to refuse Granite State’s claims.

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