2nd Circ. Upholds AIG Insurer’s Loss In Reinsurance Row

By Jeff Sistrunk

Law360, Los Angeles (April 02, 2015, 7:04 PM ET) — The Second Circuit on Thursday refused to overturn a federal judge’s ruling barring an American International Group Inc. insurer from reinsurance reimbursement related to $3.5 million in asbestos litigation settlements, rejecting the insurer’s call to ignore a Seventh Circuit decision that broadly shields reinsurers from liability for late claims. Granite State Insurance Co. had asked the appellate court to decide whether reinsurer Clearwater Insurance Co. may escape liability because of the insurer’s alleged late notice, notwithstanding the fact that Clearwater had shown no prejudice from the delay. In a summary order, a three-judge appellate panel applied Illinois law to the dispute and found that the Seventh Circuit’s 1942 decision in Keehn v. Excess Insurance Co. of America, along with two subsequent Illinois trial court rulings, interpreted the state’s law as not requiring prejudice as an element of a reinsurer’s late notice defense.”Because Illinois’ no-prejudice rule is in actual conflict with New York’s prejudice requirement, and it is not disputed that the significant contacts analysis favors application of Illinois law, we conclude that Illinois’ no prejudice rule applies,” the panel said. “Clearwater was thus not required to demonstrate that it was prejudiced by Granite State’s late notice in order to refuse to pay Granite State’s claims for reinsurance coverage.”

Attorneys for the parties did not immediately respond to requests for comment.

Granite State was attempting to overturn Manhattan federal Judge Richard K. Eaton’s decision absolving Clearwater of liability related to the Illinois-issued reinsurance certificates.

On appeal, the Second Circuit considered whether, in the absence of a choice of law provision in the reinsurance certificates, a New York court would apply the law of New York or Illinois in determining the effect of Granite State’s failure to give timely notice.

Under the basic prejudice rule established in the Second Circuit’s 1992 decision in Unigard Security Insurance Co. v. North River Insurance Co., or Unigard 1, prejudice is an element of a reinsurer’s late notice defense in New York.

In Illinois, meanwhile, the most relevant rulings on the issue are the Keehn decision and two Illinois trial court decisions — one federal, one state — that agreed with Keehn that late notice to a reinsurer defeats an insurer’s claim regardless of whether the reinsurer was prejudiced, according to court documents.

The Second Circuit panel noted that another panel of the appellate court addressed the same issue last year and found that a New York court would conclude that Illinois law contains a no-prejudice rule.

“We follow the panel’s finding that ‘a New York state court would … adhere to the consensus drawn from these federal and state court decisions’ which interpret Illinois reinsurance law as containing a no prejudice rule,” the appellate panel said in Thursday’s order.

Between 1980 and 1984, Granite State said it issued four excess liability insurance policies to McGraw Edison, two of which were reinsured by facultative certificates issued by Skandia America Reinsurance Corp., now known as Clearwater.

The claims at issue arise out of asbestos losses of two subsidiaries of McGraw Edison — Dresser Industries and Federal Mogul Corp.

In 1982, Skandia was informed of the claims. Another notice was sent in 1994, and then at some point AIG consolidated all its asbestos-related claims into one unit, which Granite State claims to be the cause of subsequent notice problems.

By 2004, Federal Mogul and Dresser were facing significant asbestos liability, and both had filed for bankruptcy protection to resolve those liabilities. AIG settled its part in both those cases, for $72 million and $262 million, respectively — and those amounts were spread out among various subsidiaries. In its complaint, Granite State asked for about $3.5 million plus some future payments to be awarded to it.

In 2008, AIG noticed there had been a coding problem with the Granite State policies and notified Clearwater about the settlements, and the current dispute began.

Judges Pierre N. Leval, Robert D. Sack and Christopher F. Droney sat on the appellate panel.

Granite State is represented by Edward P. Krugman of Cahill Gordon & Reindel LLP.

Clearwater is represented by James Ira Rubin, Julie Rodriguez Aldort and Catherine Eleanor Isely of Butler Rubin Saltarelli & Boyd LLP and by David Charles Frederick and Derek T. Ho of Kellogg Huber Hansen Todd Evans & Figel PLLC.

The case is Granite State Insurance Co. v. Clearwater Insurance Co., number 14-1494, in the U.S. Court of Appeals for the Second Circuit.

–Additional reporting by Juan Carlos Rodriguez and Pete Brush. Editing by Philip Shea.