It’s been a while since there has been a court opinion on the defense of late notice in a reinsurance dispute. Recently, a Texas federal court had the pleasure of addressing the issue.
In United States Fire Insurance Co. v. Unified Life Insurance Co., No. 3:22-cv-00868-BT (N.D. Tex., Mar. 29, 2024, the cedent sought a reinsurance recovery after a class-action settlement. The reinsurer objected on late notice grounds. The reinsured product was short term medical insurance and the underlying dispute was a claim concerning the classification of medical benefits in such a way to deny payment. Ultimately, a class action was allowed and after a flurry of motions and an interlocutory appeal to the 9th Circuit, the parties settled.
The underlying action was commenced in April 2017 and notice of the claim was given to the reinsurer in December 2019. Settlement took place November 2021. The reinsurer rejected the claim and brought this declaratory judgment action alleging a late notice defense. Both parties moved for summary judgment. In granting the cedent’s motion for summary judgment and denying the reinsurer’s defense of late notice, the court found that timely notice was provided.
[The cedent] has established beyond peradventure all of the essential elements of its breach of contract counterclaim to warrant judgment in its favor. Also, there are no genuine disputes of material fact regarding [the reinsurer]’s late notice defense or its declaratory judgment claim. Thus, [the cedent] is entitled to summary judgment on its breach of contract and declaratory judgment counterclaims.
The key to any breach of contract dispute is the contract itself. Here, the notice provision in the reinsurance contract provided that the cedent:
shall . . . advise the Reinsurer promptly of all Claims which, in the opinion of [the cedent], may result in a Claim hereunder and of all subsequent developments thereto which, in the opinion of [the cedent], may materially affect the position of the Reinsurers.
The parties disputed whether the notice provision had an objective or subjective standard and whether “reasonableness” should be read into the reinsurance contract. As the court held:
Under the terms of the Reinsurance Treaty, [the cedent] has a duty to provide “prompt[]” notice once, ” in the opinion of [the cedent], ” the underlying lawsuit may result in a claim that would result in reinsurance liability. The notice provision conspicuously fails to include any modifier requiring that [the cedent]’s opinion must be “reasonable.” (citations omitted)
The court refused to insert the term “reasonable” into the notice clause based on Texas law of contract interpretation, and held that it was constrained by the contract’s express terms and the plain language chosen by the parties. Moreover, the court rejected the reinsurer’s claim that the notice provision provided the cedent with “unfettered” discretion and found that notice was required based on the cedent’ actual subjective opinion. That subjective standard found support in the evidence, which, according the court, demonstrated that the cedent did not believe that the underlying claim would result in reinsurance liability to the reinsurer in April 2017. That opinion did not change until the 9th Circuit denied the interlocutory appeal.
The court concluded that there was no genuine dispute and that the cedent had shown that it provided “prompt” notice to the reinsurer, which, “in the opinion of [the cedent],may result in a Claim [under the Reinsurance Treaty],” as required by the parties’ agreement.
The court then went on to address the notice prejudice issue that arises in late notice defenses. The court rejected the reinsurer’s claim that the cedent acted in bad faith in not providing notice and found that the reinsurer could not demonstrate actual prejudice. The court dismissed the reinsurer’s argument that it was prejudiced because it could not exercise its right to associate, which the court termed theoretical rather than actual prejudice. In other words, the reinsurer did not point to any evidence of tangible injury, but stressed only the mere possibility that if it had been notified earlier, its expert recommendations may have made a difference in the outcome. The court found that based on the record no reasonable jury could find that the reinsurer was actually, tangibly prejudiced on the basis that it contends.
The court concluded that the reinsurer owed a duty under the reinsurance treaty to indemnify the cedent for the reinsurer’s proportionate share of the underlying claim settlement and associated costs and fees.
