NEW YORK COURT PREDICTS THAT CALIFORNIA COURTS WOULD RECOGNIZE BAD FAITH EXCEPTION TO NOTICE-PREJUDICE RULE IN REINSURANCE CONTEXT
The Insurance Company of the State of Pennsylvania sued its reinsurer Argonaut for liability arising from underlying asbestos litigation. ICSOP issued excess umbrella coverage to its insured, Kaiser, which manufactured products containing asbestos and faced underlying liability from lawsuits alleging asbestos-related injury. ICSOP obtained facultative reinsurance from Argonaut covering a percentage of the Kaiser excess policy. ICSOP received notice in 2001 that Kaiser had exhausted primary coverage, implicating the umbrella coverage. Kaiser ultimately brought ICSOP into a coverage lawsuit in California in 2002, which was litigated extensively until a 2009 mediation. However, ICSOP did not notify Argonaut until 2009 of the potential exposure under the facultative reinsurance, long after the court had made a number of rulings adverse to ICSOP. Argonaut denied ICSOP’s claim citing, among other things, untimely notice. ICSOP filed suit and the parties cross-moved for summary judgment on the late notice issue.
The Southern District of New York, applying California law, held that notice had been untimely, but that in order to be excused from paying claims Argonaut had to prove that it had been prejudiced by the late notice. Although it found that Argonaut had submitted sufficient evidence to raise a genuine issue of fact as to whether it had been prejudiced by the untimely notice, in anticipating evidentiary burdens at trial, the court considered whether Argonaut might be excused from showing prejudice if it demonstrated that ICSOP had acted in bad faith in providing untimely notice. The bad faith exception to the prejudice requirement has been adopted in New York and some other states. Acknowledging that California courts had not addressed whether to recognize the bad faith exception, the court predicted that California courts would recognize the exception. The court permitted Argonaut to take discovery on ICSOP’s alleged bad faith before proceeding to trial. Insurance Co. of the State of Pennsylvania v. Argonaut Insurance Co., No. 12 Civ. 6494 (USDC S.D.N.Y. Aug. 6, 2013).
This post written by John Pitblado.
