TIG Dodges AIU’s $23M Asbestos Reinsurance Claim

By Juan Carlos Rodriguez

Law360, New York (March 25, 2013, 6:36 PM ET) — A federal judge on Monday ruled that TIG Insurance Co. doesn’t owe AIU Insurance anything in a $23 million dispute over a settlement with Foster Wheeler Corp. regarding asbestos suit coverage, finding that AIU gave late notice to the reinsurer.

U.S. District Judge Sidney H. Stein endorsed a magistrate judge’s holding that AIU had breached its reinsurance certificates by not giving prompt notice to TIG about a claim from Foster Wheeler for coverage of asbestos-related injury suits. AIU informed TIG in January 2007, though it had settled the coverage fight with Foster Wheeler in June 2006, according to Judge Stein’s order.

After finding that Illinois law applied to the dispute, not New York law, as AIU had advocated, Judge Stein said Illinois law does not require TIG to prove prejudice in addition to late notice in order to avoid coverage. The judge said the Illinois Supreme Court and lower Illinois appellate courts have not ruled on the notice question in the reinsurance context, so he had to refer to a 70-year-old Seventh Circuit opinion from Keehn v. Excess Insurance Co. of America.

“The panel in Keehn concluded that, under Illinois law, a reinsurer need not prove prejudice in order to refuse coverage,” he said. “Despite its vintage, TIG urges that Keehn’s articulation of unsettled Illinois law is binding on this court. … The court reluctantly agrees.”

TIG argued the Seventh Circuit decision should stand in this case under the Second Circuit’s 1981 opinion in Factors Etc. Inc. v. Pro Arts Inc., which held that when a federal court of appeals issues a prediction of the course of state law on a question of first impression within a state, the federal courts of other circuits should defer to that holding.

Judge Stein expressed reservations about supporting that line of reasoning, saying that before and after its Factors decision, Second Circuit panels have acknowledged that the proper inquiry for a federal court in this situation is to ask what deference the courts of the forum state would give to an opinion of a federal circuit court of appeals. And he said the U.S. Supreme Court has held that federal courts of appeals cannot defer to a district court’s presumed mastery of forum law.

“The Factors approach — that federal courts must defer to the decisions of the ‘local’ federal circuit on a question of unsettled state law from a state within that circuit — locks the courts of this circuit into a bind of dubious value,” Judge Stein said. “Nevertheless, this court is bound by Factors’ ruling.”

He said in Keehn, the Seventh Circuit predicted that, under Illinois law, a notice provision in a reinsurance contract was a condition precedent to recovery, notwithstanding the lack of clear language supporting that reading in the contract itself.

“As a result, a reinsurer does not need to prove that it was prejudiced by late notice before denying coverage to a ceding insurer,” the judge said. “AIU has not pointed this court to any decision by any Illinois state or federal court disagreeing with Keehn’s conclusion.”

He said AIU didn’t cite any cases applying Illinois law where notice given more than three years late was excused.

“The court’s own survey of Illinois case law confirms that three years lies well outside the bounds of reasonable notice,” the judge said.

AIU is represented by William Maher, Marc Abrams and Michael Ledley of Wollmuth Maher & Deutsch LLP.

TIG is represented by Sean Keely of Hogan Lovells and James Rubin, Catherine Isely, Julie Rodriguez Aldort and Joelle Larson of Butler Rubin Saltarelli & Boyd LLP.

The case is AIU Insurance Co. v. TIG Insurance Co., case number 1:07-cv-07052, in the U.S. District Court for the Southern District of New York.

–Additional reporting by Bibeka Shrestha. Editing by Jeremy Barker. All Content © 2003-2013, Portfolio Media, Inc.