New York Law Does Not Require Prejudice Showing for a Late Notice Defense When Notice Is a Condition Precedent to Reinsurance Coverage
In New York, a reinsured's failure to provide prompt notice of a claim to its reinsurer precludes recovery when notice is a condition precedent to coverage. In Pacific Employers Insurance Company v. Global Reinsurance Corporation of America, the Third Circuit (applying New York law) held that when a reinsurance agreement "expressly requires" prompt notice of a claim or occurrence as a "condition precedent" to coverage, the reinsured's failure to give such notice "excuses the reinsurer from its duty to perform," without showing that it "suffered prejudice as a result of the late notice." 693 F.3d 417 (3d Cir. 2012).
In general, courts excuse a party's contractual performance only when the other party materially breaches the contract. Under this general rule, when an insured breaches a prompt notice provision, the insurer's performance is excused only when the delay causes "actual prejudice" (i.e., the breach is material) and when prompt notice is a condition precedent to performance.
New York recognizes an exception to these general contract law principles in the primary insurance context. Specifically, a notice provision in an insurance agreement always "operates as a condition precedent" to the insurer's performance. Sec. Mut. Ins. Co. of New York v. Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440 (1972). Moreover, the insurer need not show prejudice to prevail on a late notice defense. See id. Requiring strict compliance with a notice provision allows insurers to efficiently investigate and settle claims and prevent fraud.
But historically, New York has not applied this exception to reinsurance agreements because of the differences between reinsurance relationships and primary insurance relationships. Unlike primary insurers, reinsurers are not responsible for investigating, defending, or settling claims and do not owe any duties to the underlying insured. Therefore, courts have determined that a late notice defense to a reinsurance agreement requires a showing of prejudice. See Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 79 N.Y.2d 576, 584 (1992).
The Third Circuit's Ruling
In Pacific Employers Insurance Company v. Global Reinsurance Corporation of America, the court recognized the general contract law principle that parties to a contract can agree on conditions precedent to performance and applied that principle to reinsurance agreements. Although New York had previously required a reinsurer to show prejudice to succeed on a late notice defense, the court held that no prejudice showing is required when a reinsurance agreement requires prompt notice as a condition precedent to coverage.
Because the reinsurance contract in Pacific expressly required prompt notice as a condition precedent to coverage-and Pacific provided notice seven years after learning of the claim—Global prevailed on its late notice defense. The Third Circuit adopted the district court's interpretation of New York law as to the effect of a condition precedent notice, but reversed the district court because it had applied Pennsylvania law and found that Global did not show prejudice.
What It Means
In light of Pacific, reinsurance agreements governed by New York law may allow reinsurers an additional coverage defense. Reinsurers may wish to bargain for condition precedent notice clauses so that the defense is available if cedents fail to provide them prompt notice of certain claims or occurrences. Similarly, cedents should dutifully comply with condition precedent notice clauses to be indemnified under such reinsurance agreements with notice as a condition precedent to coverage.