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Second Circuit finds reinsurer can refuse to pay in asbestos cases with late filings

By Heather Isringhausen Gvillo | Aug 28, 2014

NEW YORK (Legal Newsline) – The U.S. Court of Appeals for the Second Circuit has affirmed a lower court’s ruling that Illinois law allows a reinsurer to refuse to pay claims in asbestos cases when notices are filed several years late.

Circuit Judge Peter W. Hall and District Judge J. Garvan Murtha delivered the Aug. 27 summary order affirming the lower court’s judgment in favor of TIG Insurance Company.

AIU Insurance Company appealed a decision out of the U.S. District Court for the Southern District of New York, which granted summary judgment in favor of TIG.

The district court concluded that Illinois law applied to the reinsurance contract dispute between the parties, and that according to such law, late notice defeated AIU’s claim for coverage under the reinsurance certificates.

However, AIU argued the court should have applied New York law when deciding whether proof of prejudice was required and that the district court erred when it held that Illinois law does not require a reinsurer to demonstrate prejudice in order to avoid any obligation to perform under the relevant certificates.

AIU previously issued umbrella insurance policies to the Foster Wheeler Corporation in the 1970s and 1980s.

Foster Wheeler formerly manufactured asbestos-containing heat exchange equipment. As a result, it was named a defendant in numerous asbestos lawsuits throughout the country in the 1990s.

TIG, through its predecessor International Insurance Company, reinsured AIU’s Foster Wheeler policies through nine certificates of facultative reinsurances.

Then in 2003, Foster Wheeler brought claims to AIU that were rooted in the asbestos litigation. The two eventually reached a settlement agreement.

By 2007, AIU issued a notice of its intent to bill TIG as its reinsurer under the reinsurance certificates.

However, TIG refused to pay, saying the notice AIU provided was late.

AIU sued TIG for recovery based on the reinsurance certificates.

The district court ruled in favor of TIG, granting its motion for summary judgment. It held that Illinois law applied in the case, finding that AIU’s late notice excused TIG from performance under the certificates. AIU appealed.

The appeals court agreed with the district court “that the state having the most significant relationship to the transaction and parties” is the proper substantive law to apply.

AIU argued that applicable contacts with New York outweigh those with Illinois. The appeals court remained unpersuaded, finding that the district court’s decision to apply Illinois law was well-reasoned.

AIU also argued that because Illinois law is unsettled as to whether prejudice due to late notice must be proven, a New York court would presume that the unsettled law of the foreign state would resemble its own. Again, the appeals court disagreed.

The appeals court explained that various courts addressing this issue have concluded that the law of Illinois does not require a reinsurer to demonstrate prejudice resulting from the late notice.

“Viewing this issue as a New York state court would, we, therefore, adhere to the consensus drawn from these federal and state court decisions that Illinois law does not require a reinsurer to prove prejudice when it refuses to pay a claim for reinsurance coverage based on having received late notice of that claim,” the order states.

“As AIU has failed to offer any argument that it provided timely notice to TIG, we are left to consider whether the delay from October of 2003 to January of 2007 in notifying the reinsurer was prompt,” it added.

The court explained that while Illinois courts have excused late notice in previous cases, the “very limited” circumstances giving rise to those excused delays do not exist in the case at hand.

AIU’s roughly three-year delay while the insurance company was in the midst of litigation with Foster Wheeler differs from the examples of excused delay in similar Illinois cases.

“We agree with the district court, therefore, that a three-year delay on the part of the ceding company before notifying a reinsurer of a claim falls outside the bounds of reasonable notice,” the order states.

Therefore, the court concluded that TIG was entitled to refuse coverage and the district court correctly determined that summary judgment was proper.

From Legal Newsline: Reach Heather Isringhausen Gvillo at asbestos@legalnewsline.com

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