by ~ Rachel M. Davison (Email) (Web Site)
A recent decision coming from the U.S. District Court for the Eastern District of Pennsylvania highlights the importance of a ceding company being diligent and timely in the submission of claims to its reinsurer. In OneBeacon Insurance Company v. Aviva Insurance Limited, No. 10-7498 (E.D. Pa. May 17, 2013)(DuBois, J.), the court granted partial summary judgment in favor of the reinsurer and concluded that certain ceded claims were time-barred.
This case involves a dispute between a ceding company and its reinsurer about approximately $13 million in ceded claims and arises from an unwritten reinsurance agreement that the parties had operated under since 1997. Because the reinsurance agreement was unwritten, for purposes of the litigation, the parties stipulated to various terms, including a follow-the-fortunes clause and an errors and omissions clause. The errors and omissions clause protected the ceding company by not relieving the reinsurer of liability because of an error or accidental omission of the ceding company in reporting any claim, provided that the error or omission was rectified as soon as commercially reasonable after discovery. In addition, the parties stipulated that the reinsurer did not precondition payment on any documentation requirements other than the submission of bordereaux which were validated by the reinsurer.
The primary issue presented to the court was whether certain of the ceded claims were barred by the statute of limitations. Apparently, beginning after a corporate merger in 1998, certain bills were not submitted to the reinsurer. This issue was supposedly not discovered until 2005, but the reinsurer contended that the ceding company did not properly investigate the billing problems. Notwithstanding the questions surrounding the ceding company’s diligence in discovering the missing billings, the ceding company prepared two catch-up billings in 2005: a May billing for more than $2.3 million and a June billing for almost $18 million. In 2006, the ceding company informed the reinsurer that it had another catch-up billing of approximately $4.4 million, which was submitted in October.
Meanwhile, in August 2006, the parties negotiated a standstill agreement to toll the statute of limitations for the 2005 billings. The standstill agreement was in effect until it was terminated by the ceding company as of December 2010. After the standstill agreement was terminated, the ceding company filed suit because the reinsurer had refused to pay a large number of ceded claims. The parties cross-moved for summary judgment on three issues related to the application of the statute of limitations: (1) whether there was a condition precedent to the reinsurer’s payment obligations, (2) whether the ceding company unreasonably delayed in submitting certain bordereaux, and (3) how the standstill agreement applied to the relevant claims.
Submission of Bordereaux as a Condition Precedent
Pennsylvania has a 4-year statute of limitations for unwritten contracts, which, like the statute in Massachusetts, begins to run when the contract is breached. If a contract is conditional, the statute of limitations runs from the time the condition is satisfied. The court concluded that the submission of bordereaux was a “condition precedent” to the reinsurer’s payment obligation, and it was the submission of the bordereaux that started the clock for statute of limitations purposes. This conclusion was based on the parties’ stipulation that the reinsurance agreement provided that the reinsurer did not precondition payment on any documentation requirements other than the submission of bordereaux which were validated by the reinsurer.
Reasonableness of Delay in Billing
Having determined when the cause of action accrued, the court turned to whether the ceding company’s delay in providing the catch-up billing was reasonable. As noted above, the parties stipulated that the reinsurance agreement contained an errors and omissions clause that did not excuse the reinsurer’s performance if the ceding company corrected an error or accidental omission in reporting claims or losses as soon as commercially reasonable after discovery. However, the court concluded that there was a genuine dispute of material fact that precluded summary judgment on whether the delay was reasonable insofar as there were conflicting stories about who knew what and when about the billing issues.
Application of Standstill Agreement
After concluding that there was an issue of fact regarding the reasonableness of the delay in submitting the catch-up billings, the court focused on how the standstill agreement would apply to the various ceded claims. If the ceding company’s delay in submitting the catch-up billings was reasonable, the submission of all of the losses in the May and June 2005 billings were timely pursuant to the terms of the standstill agreement. However, if the delay was not reasonable, the payments contained in the May and June 2005 billings that were made by the ceding company more than four years before the effective date of the standstill agreement were time barred. In any event, by its terms, the standstill agreement did not apply to any billings other than the 2005 billings, and all of the losses in the October 2006 billing were time-barred by as of the time this suit was filed by the ceding company in December 2010.
In addition to moving for summary judgment on the statute of limitations issues, the ceding company moved for summary judgment on the so-called de-lamination claims. These were property damage claims arising from the failure of an underlying policyholder’s glue to properly bond and the resulting separation or de-lamination of the glued materials.
In 1999 the ceding company sought the assistance of counsel because it disagreed with the policyholder about the trigger of coverage for the de-lamination claims. The insurer wanted a manifestation trigger, whereas the policyholder wanted the coverage to be triggered from the application of the glue to the materials. The ceding company obtained a legal opinion that was inconclusive as to the trigger issue. The trigger issue did not necessarily become important until the coverage was non-renewed in June 2001. Despite the uncertainty regarding the trigger issue, the policyholder continued to submit claims and the ceding company continued to settle them. The reinsurer disputes that it was reasonable for the ceding company to decide that claims submitted after the non-renewal were within the scope of coverage of the underlying policy but does not contend that the ceding company acted in bad faith or collusively.
The parties agreed that the follow-the-fortunes clause of the reinsurance agreement controls, but they disagreed about whether the de-lamination claims were subject to it. The reinsurer took the position that because the de-lamination claims were clearly beyond the scope of the underlying policy, it was not obligated to follow the fortunes of the ceding company. Relying on the opinion it received from outside counsel which was inconclusive about the trigger issue, the ceding company argued that the reinsurer cannot carry its burden of establishing that the payments it made for the de-lamination claims were “clearly beyond the scope” of the underlying policy. In support of its position, the reinsurer pointed to testimony from the ceding company’s corporate designee that the ceding company paid some of the de-lamination claims without regard to whether they were within the scope of the policy or not and offered expert testimony that the ceding company violated its duty of utmost good faith and did not reasonably handle the de-lamination claims. Taking these facts into account, the court concluded that there was a genuine dispute that precluded summary judgment on the issue of whether the reinsurer is excused from its reimbursement obligation and does not have to the follow-the-fortunes based on the de-lamination claims being beyond the scope of the underlying policy.
The final issue addressed by the court was the ceding company’s argument that after 2001 the reinsurer improperly required additional documentation before it would make payment of the ceded claims. The ceding company did not expressly agree to provide documentation beyond the bordereaux but did attempt to provide some additional documents over the years. The court concluded that there was a genuine factual dispute about whether the ceding company’s course of conduct in submitting documents in addition to the agreed upon bordereaux amounted to a modification of the unwritten reinsurance agreement that created an additional condition precedent to the reinsurer’s payment obligation.
This decision emphasizes the importance of careful drafting of reinsurance agreements so that the parties have a clear and mutual understanding about the terms and limitations of their relationship. It also spotlights how ceding companies should be diligent in ceding claims in a timely manner and how standstill agreements can protect aging claims.
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