UNIGARD SEC. INS. CO., INC. v. NORTH RIVER INS, 949 F.2d 630 (2nd Cir. 1991)

UNIGARD SECURITY INSURANCE COMPANY, INC., SUCCESSOR TO UNIGARD MUTUAL INSURANCE COMPANY, INC., PLAINTIFF-APPELLANT, v. NORTH RIVER INSURANCE COMPANY, DEFENDANT-APPELLEE.

No. 197, Docket 91-7534.United States Court of Appeals, Second Circuit.
November 26, 1991.

Before WINTER, ALTIMARI, Circuit Judges, and POLLACK, District Judge.[*]

[1] ORDER
[2] On consideration of the briefs and records and the oral argument in this appeal, it is hereby ORDERED that the Clerk of the Court transmit to the Clerk of the New York Court of Appeals a Certificate in the form attached, together with a complete set of the briefs, appendix, and record filed by the parties with this court.

APPENDIX

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Docket No. 91-7534

Filed November 26, 1991

UNIGARD SECURITY INSURANCE COMPANY, INC., successor to
UNIGARD MUTUAL INSURANCE COMPANY, INC., Plaintiff-Appellant,

— v. —

NORTH RIVER INSURANCE COMPANY, Defendant-Appellee.

Certificate to the New York Court of Appeals (pursuant to
McKinney’s Revised 1991 New York Rules of Court § 500.17(b)
— certification of unsettled questions of state law)

Unigard Security Insurance Company, Inc. (“Unigard”) is a
Washington corporation

Page 631

with its principal place of business in Seattle. It is a
successor to Unigard Mutual Insurance Company, Inc. (“Unigard
Mutual”). North River Insurance Company (“North River”) is a New
Jersey corporation with its principal place of business in New
Jersey. It is a subsidiary of Crum and Forster, Inc.

In 1974, North River issued a high layer excess insurance
policy to Owens-Corning Fiberglass Corporation (“Owens-Corning”),
a manufacturer of asbestos-containing insulation. The policy
provided coverage in the amount of $30 million in each of two
policy periods and attached in excess of $76 million of
underlying excess and primary coverage. The policy also provided
coverage of $25 million during a third policy period with similar
underlying limits. Unigard issued a facultative reinsurance
certificate to North River reinsuring North River for a portion
of the risk of loss under the Owens-Corning excess liability
policy. The Unigard facultative certificate, which was issued in
New York and is governed by New York law, requires North River to
provide Unigard with prompt notice of “any occurrence or accident
which appears likely to involve” the reinsurance.

In August 1987, North River sent precautionary notice to
Unigard under the facultative certificate advising Unigard of
potential asbestos-related losses to be incurred by North River
by Owens-Corning excess policy. Unigard did not receive that
notice until September 2, 1987. North River thereafter submitted
reinsurance claims to Unigard and its other reinsurers on the
Owens-Corning risk.

After receiving North River’s precautionary notice, Unigard
commenced a declaratory judgment action in February 1988 in the
United States District Court for the Southern District of New
York. Unigard sought a declaration that it owed no obligation to
reinsure North River under the facultative certificate in respect
of Owens-Corning asbestos losses. This action was based upon
Unigard’s claim that the notice it received from North River in
September 1987 was late under the terms of the facultative
certificate. North River counterclaimed for monetary damages and
a declaration that Unigard was obligated to pay future
Owens-Corning claims under the facultative certificate.

After a nine-day bench trial, the district court concluded that
North River’s notice obligation was triggered in April 1987.
Unigard Sec. Ins. Co. v. North River Ins. Co., 762 F.Supp. 566,
591 (S.D.N.Y. 1991). However, Unigard was not notified until
September 2, 1987, over five months later. The district court
held that, under an objective standard, this notice was untimely.
Id. But the district court rejected Unigard’s late-notice
defense, because it believed that New York law required a
reinsurer to demonstrate prejudice arising from late notice and
Unigard had not shown such prejudice. Id. at 592-94. Judgment
was entered for North River.

Unigard appealed to this court, arguing that under New York law
a reinsurer should not be required to prove prejudice in order to
successfully assert a late-notice defense. In support, Unigard
relies upon the New York rule that a direct insurer may
successfully invoke the defense of untimely notice of loss
without showing prejudice. See, e.g., Security Mut. Ins. Co. v.
Acker-Fitzsimons Corp., 31 N.Y.2d 436, 440, 293 N.E.2d 76, 78,
340 N.Y.S.2d 902, 905 (1972). North River argues that the
rationale for applying this “prejudice peruse” rule in the direct
insurance context does not exist in the reinsurance context, and
thus New York’s general principle that a contract must be
enforced absent material breach or prejudice should apply. See,
e.g., Restoration Realty Corp. v. Robero, 58 N.Y.2d 1089, 1091,
449 N.E.2d 705, 706, 462 N.Y.S.2d 811, 812 (1983).

This court has found no New York appellate court decision
addressing the question of whether a reinsurer must prove that it
was prejudiced by untimely notice of loss in order to
successfully invoke a late-notice defense. The only New York
trial court decision to address the issue held that a reinsurer
is required to demonstrate prejudice.

Page 632

General Ins. Co. v. Nutmeg Ins. Co., No. 6213-85 (N.Y.Sup.Ct.
July 24, 1987).[1]

The unsettled question that should be decided by the New York
Court of Appeals is as follows:

Must a reinsurer prove prejudice before it can
successfully invoke the defense of late notice of
loss by the reinsured?

This question should be decided by the New York Court of
Appeals at this time because determination of the legal
requirements for the assertion of a late-notice claim in the
reinsurance context is important to purchasers and sellers of
reinsurance issued in New York and to the reinsurance industry.
Moreover, the issue directly implicates New York’s interest in
the interpretation and enforcement of reinsurance contracts
executed within its borders.

The issue has been addressed in two other recent federal cases,
and has given rise to a split of authority within the Southern
District of New York. Compare Christiana Gen. Ins. Corp. v.
Great Am. Ins. Co., 745 F.Supp. 150 (S.D.N.Y. 1990) (holding that
reinsurer must demonstrate prejudice to prevail on late-notice
defense), appeal docketed, No. 91-7912 (2d Cir. Sept. 23, 1991);
with Travelers Ins. Co. v. Buffalo Reins. Co., 735 F.Supp. 492
(reinsurer need not prove prejudice), vacated in part, 739
F.Supp. 209 (S.D.N.Y. 1990).

There is no New York Court of Appeals precedent on point, and
New York has a strong interest in deciding the issue certified
rather than having as the only precedents on point a single state
trial court decision and conflicting federal court opinions.

The question herein presented is likely to recur, and its
resolution at this time by the New York Court of Appeals would
aid in the administration of justice.

The foregoing is hereby certified to the Court of Appeals for
the State of New York as ordered by the United States Court of
Appeals for the Second Circuit.

Dated at New York, New York, this 26th day of November, 1991.

/s/ ELAINE B. GOLDSMITH

Clerk of the United States Court
of Appeals for the Second Circuit