Second Circuit Confirms Prejudice Not Necessary for Dismissal of Reinsurance Claim Under Illinois Law

In AIU Insurance Co. v. TIG Insurance Co., 2014 U.S. App. LEXIS 16513 (2d Cir. Aug. 27, 2014), the Second Circuit Court of Appeals applied Illinois law and affirmed a lower court’s dismissal of a reinsurance claim for reasons of late notice alone, declaring that the reinsurer was not required to demonstrate prejudice as a result of the delay.

In the underlying action, the AIU Insurance Company issued several umbrella policies to the Foster Wheeler Corporation in the early 1970’s through the late 1990’s. AIU reinsured these policies under several reinsurance certificates issued by TIG Insurance Company. Foster was sued in several asbestos related lawsuits in 2003, which were tendered to AIU to defend. AIU picked up Foster’s defense, and eventually settled the cases. However, AIU did not give TIG notice of its intent to bill TIG as reinsurer under the reinsurance certificates until 2007, and TIG refused to pay. AIU then sued TIG to recover under the reinsurance certificates.

The Second Circuit affirmed the district court’s decision that Illinois, and not New York law applied. Unlike New York law, Illinois law does not require a reinsurer to demonstrate prejudice as a result of an insured’s late notice before disclaiming coverage. The court then ruled that a “three-year delay on the part of the ceding company before notifying a reinsurer of a claim falls outside the bounds of reasonable notice,” and held TIG was entitled to refuse coverage under these circumstances.

In considering AIU’s contention that the prejudice issue was not wholly settled under Illinois law, the Second Circuit declined to apply New York law to the case. It noted that the Seventh Circuit had previously determined that prejudice was not required under Illinois law, and stated, where “the pertinent court of appeals has essayed its own prediction of the course of state law on a question of first impression within that state, [ ] other circuits should defer to that holding.”