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Court Crier: Reinsurance

In Global Reinsurance Corporation of America v. Century Indemnity Company, the New York Court of Appeals addressed the certified question from the United States Court of Appeals for the Second Circuit whether New York precedent “imposes either a rule of construction, or a strong presumption, that per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses,” such as defense costs, in addition to the limits of liability. The court answered the question in the negative, holding that New York law “does not impose either a rule, or a presumption, that a limitation on liability clause necessarily caps all obligations owed by a reinsurer, such as defense costs, without regard for the specific language employed therein” because “[r]einsurance contracts are governed by the same principles that govern contracts generally.” (December 14, 2017)

In In re ROM Reinsurance Management Company, Inc. v. Continental Insurance Company, Inc., the New York Supreme Court, Appellate Division, 1st Department, addressed the issue of whether petitioner could halt the arbitration process on statute of limitations grounds. The court noted that petitioners were precluded from doing so because they participated in the arbitration by participating in the arbitrator selection process, and distinguishing an earlier case wherein a stay was granted prior to receiving notice of respondent’s claims. The court concluded that while the right to have the courts determine the statute of limitations issue was waived, the issue could be determined by the arbitrators

In Ario v. The Underwriting Members of Syndicate 53 at Lloyds for the 1998 Year of Account, the United States Court of Appeals for the Third Circuit Court addressed the interplay between the Convention of the Recognition and Enforcement of Foreign Arbitral Awards and the Federal Arbitration Act (FAA). The parties-reinsurers and primary insurers-entered into four reinsurance treaties. Later disputes about the treaties went to arbitration, and the arbitration panel, in an unreasoned award, rescinded three of the four treaties, relieving the reinsurers of any obligation to pay losses. The primary insurers sought to vacate the award, arguing that the panel improperly applied the FAA despite the parties having opted out of the FAA. The Third Circuit held that "while parties may opt out of the FAA's default rules, they cannot 'opt out' of FAA coverage in its entirety because it is the FAA itself that authorizes parties to choose different rules in the first place." (August 18, 2010)

In Specialty Surfaces International, Inc. d/b/a Sprinturf, Inc. v. Continental Casualty Co., the United States Court of Appeals for the Third Circuit addressed whether Continental had a duty to defend Sprinturf in a lawsuit filed in the Superior Court of California. According to the allegations, a California high school district contracted with a general contractor for the construction and installation of synthetic turf football fields at four district schools. The contractor hired a subcontractor to install turf manufactured by Specialty Surfaces and a drainage system installed by Empire, a wholly-owned subsidiary of Specialty Surfaces. Within one year of installation, the turf began to exhibit defects in materials and workmanship, and experienced failures in its draining system. The school district alleged that Empire's negligence led to the damage to the turf. The School district further alleged that Specialty Surfaces and Empire breached the terms of the warranty agreement. Subject to a reservation of rights, Continental agreed to defend Specialty Surfaces and Empire (as an additional insured), on the negligence claim only. Under the applicable insurance policy, Continental would pay damages because of "property damage" only if the "property damage" was caused by an "occurrence." The District Court granted summary judgment in favor of Continental, concluding that all of the claims in the school district's suit were based on "allegations of faulty workmanship and failure to comply with the contract documents, which are not accidents," and, thus, the alleged property damage had not been caused by an "occurrence." As a result, Continental had no duty to defend. The Third Circuit affirmed. The Court found that a breach of contract claim did not constitute an "occurrence" in a commercial general liability policy under Pennsylvania law. Further, relying on Millers Capital Ins. Co. v. Gambone Bros. Development Co., 941 A.2d 706 (Pa. Super. 2007), the Court determined that the allegations of negligence were claims of damage based on faulty workmanship, which damage was not "sufficiently fortuitous to constitute an 'occurrence' or 'accident,'" but was instead a foreseeable result of the faulty workmanship. (June 8, 2010)

In Devcon International Corp. v. Reliance Ins. Co., the United States Court of Appeals for the Third Circuit recently issued a decision regarding the duty to defend and indemnify in a nuisance action. In this case, the Virgin Islands airport retained a general contractor to extend the airport's runway. Shortly after construction began, large amounts of dust drifted over nearby property belonging to the plaintiffs. The dust contaminated drinking water and caused breathing and other disorders. Suit was filed alleging claims against the general contractor for nuisance, trespass, negligence, and negligent and intentional infliction of emotional distress. The contractor tendered defense of the plaintiffs' claims to Reliance which, in turn, questioned whether the applicable policy provided coverage as coverage was excluded for injuries resulting from pollution, but agreed to defend pursuant to a reservation of rights. The general contractor thereafter commenced a declaratory judgment action to ascertain Reliance's obligation to defend and indemnify. The District Court found that the pollution exclusion removed coverage for the plaintiffs' injuries and, therefore, the general contractor had no reasonable expectation of coverage. On appeal, the Third Circuit affirmed, finding that the exclusion was not ambiguous. Rather, it clearly stated that it provides no coverage when bodily injury results from airborne solids and fumes (such as those alleged in the underlying action) "at any time," and the exclusion contained no language limiting its scope. (June 8, 2010)

In Aronberg v. Tolbert, et al., the Superior Court of New Jersey addressed whether N.J.S.A. 39:6A-4.5(a), which bars uninsured drivers from suing for personal injuries sustained in automobile accidents, applies to a wrongful death action brought by the uninsured decedent's heirs. Plaintiff had insured his vehicle but, as a result of his failure to pay premiums when due, the insurance was canceled. Shortly thereafter, plaintiff was involved in a fatal motor vehicle accident. Plaintiff's mother brought an action against the other driver involved in the accident and that driver's employer, alleging a survival claim on behalf of her son and a wrongful death claim on behalf of her son's estate. Defendants' summary judgment was granted in part, resulting in the dismissal of the survival claim only. The Superior Court affirmed the lower court's holding. The Superior Court explained that with regard to the survival action-which permits a decedent's estate to pursue any cause of action that the decedent would have had if he had survived-the plaintiff would have been statutorily barred from asserting a cause of action for losses sustained in the accident if he lived because the plaintiff was driving his uninsured vehicle at the time of the accident. With regard to the wrongful death action, however, the Superior Court clarified that such an action compensates the survivors of the decedent for their losses, and does not accrue to the decedent. As a result, the Court declined to apply the statutory bar to the wrongful death action. (June 8, 2010)

In Travelers v. Insurance Co. of North America, the United States Court of Appeals for the Third Circuit recently issued a decision regarding, inter alia, whether the plaintiffs' award of prejudgment interest (or "delay damages") should be calculated according to Pennsylvania law under Pa.R.C.P. 238, or a higher rate pursuant to New York law. The District Court concluded that, even though the parties agreed New York law governed the reinsurance contracts at issue in the case, Pennsylvania law governed the calculation of prejudgment interest on the damages awarded to the plaintiff. The District Court reasoned that the law governing the calculation of prejudgment interest in Pennsylvania contract actions is procedural, rather than substantive, for choice-of-law purposes. The Third Circuit disagreed, and noted that Pennsylvania's delay damages or prejudgment interest rule serves a primarily substantive role in contracts. In tort cases, the delay damages rules serves a procedural purpose (combating the backlog in the courts) in a manner that incidentally affects the substantive right to be compensated for the loss of the use of one's money. However, the Third Circuit reasoned that rules that govern prejudgment interest do the reverse in contract actions, and serve a compensatory purpose in a manner that only incidentally affects the number of cases that go to trial. Therefore, the Third Circuit held that Pennsylvania law governing the calculation of prejudgment interest in contract actions is substantive, and that prejudgment interest should have been calculated under the New York rate. (June 9, 2010)

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