Reinsurer Avoids Asbestos Defense Costs

Pacific Employers Insurance Co. v. Global Reinsurance Corp. of America

(3d Cir. Sept. 7, 2012)

On September 7, 2012, the US Court of Appeals for the Third Circuit reversed a lower court ruling holding Global Reinsurance Corp. (Global) accountable for $1 million in asbestos litigation costs paid by Pacific Employers Insurance Co. (Pacific), finding that Pacific did not promptly notify Global.

The court said that Pacific was obligated to notify Global of the asbestos suits facing manufacturing company Buffalo Forge Co. as soon as Pacific was made aware of them, and not only when Pacific sought an indemnity payment from Global. The appeals court also found that the district court erred in applying Pennsylvania law to the case, ruling that New York has the most significant relationship to the reinsurance policy.

In the absence of controlling authority fromPennsylvania’s highest court, which had never found occasions to address the issue, the district court predicted that under Pennsylvania law Global would have to show prejudice resulting from late notice in order to escape liability. The Third Circuit assumed without deciding, for the sake of its choice-of-law analysis in this case, that Pennsylvania law includes a “must-show-prejudice rule” for reinsurance contracts, even those which make a notice provision an express condition precedent to coverage.

However, when the reinsurance agreement was signed in 1980, Global was located in New York and accepted the terms and conditions of the agreement in that state. For its part, Pacific was located inLos Angeles at that time, leaving the parties no reason to expect that Pennsylvania law would govern any disputes over the contract, according to the court. Therefore, the appeals court determined that New Your law should apply. In New York, a reinsurer is excused from its duty to perform if it is not provided with prompt notice, even if it did not suffer prejudice as a result.

Pacific also argued that the agreement only required it to provide Global with a definitive statement of loss when Pacific made a request for an indemnity payment, and not immediately after learning of “a death, serious injury or lawsuit” covered by the policy. The appeals court said that Pacific’s reading creates an issue with the language of the provision, which says it applies to both “claims and occurrences.” In the opinion of the court, that choice of words confirms that Pacific’s obligation begins before the company could demand payment.

For a copy of this decision, click here.