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PA Federal Court Holds Cedent’s Claims Time Barred

Reinsurance Alert | May 28, 2013
by: Daryn Rush and Thomas Klemm

In a decision issued on May 17, the U.S. District Court for the Eastern District of Pennsylvania granted partial summary judgment in favor of a reinsurer on the grounds that some of the ceding company’s claims were time barred under Pennsylvania’s four-year statute of limitations. OneBeacon v. AVIVA, 10-7498 (May 17, 2013).  Finding that the submission of bordereaux billings to the reinsurer was a condition precedent under the reinsurance contract, the court held that the statute of limitations began to run from the performance of that condition.  By citing the condition precedent as the trigger for the start of the statute of limitations, the court did not have to decide the parties’ principal arguments regarding other potential triggers.  The decision serves as a reminder in breach of contract cases that the clock for statute of limitations does not necessarily start at the time of the breach.

The case arose out of a dispute between a ceding company (identified by the court as the "US Entity") and a UK-based reinsurer, which was its former parent company (the “UK Entity”).  The reinsurance agreement was never memorialized in writing, but the parties agreed that a valid and binding agreement exists.  The parties also stipulated that the agreement would include certain customary clauses and provisions.  One of the key stipulated facts was that prior to 2001, “the UK Entity did not precondition payment on any documentation requirements other than the submission of bordereaux . . . .”

According to the US Entity, it failed to include all amounts in its bordereaux billings after a corporate merger in 1998.  The US Entity claimed that it did not discover this problem until 2005.  The UK Entity asserted that the US Entity discovered the problem as early as 1998 but failed to properly investigate the situation.  The US Entity submitted two catch-up billings in July 2005, and the UK Entity raised issues regarding time bar.  Unable to resolve the dispute, the parties entered into a standstill agreement, which the court ruled applied only to the two catch-up billings sent in July 2005.

The standstill agreement was eventually terminated and the US Entity filed a lawsuit on December 27, 2010.  Both parties filed motions for summary judgment regarding, inter alia, the statute of limitations issues related to the two catch-up billings and other billings.  (The parties’ summary judgment motions also included issues related to:  1) delaminated glue claims submitted by the US Entity and claim-trigger issues related to the same; and 2) whether certain claims submitted by the US Entity failed to satisfy additional documentation requirements that were allegedly put into effect in 2001.) 

Regarding the time bar issue, both parties agreed that Pennsylvania’s four year statute of limitations applied, but they disagreed on when this time period began.  The UK Entity argued that it began to run when the US Entity suffered a loss – i.e., when the US Entity made payments under the underlying insurance policies.  The US Entity argued that the time period began only when the UK Entity, as the reinsurer, denied the US Entity’s billings.

While “teed up” to address this important time bar question, the court ultimately side-stepped it.  The court held that it need not decide the disagreement regarding the date of accrual because the parties had agreed that a key condition precedent regarding the parties’ performance existed and that under Pennsylvania law the statute of limitations begins to run when such condition precedent comes into existence or is performed.  Specifically, the court held that, based on the parties’ stipulated facts (discussed above), the US Entity’s submission of bordereaux to the UK Entity was such a condition precedent. 

Although the two catch-up billings covered by the standstill agreement were submitted less than four years before the effective date of that agreement, the court declined to grant summary judgment in favor of the US Entity with respect to the catch-up billings.  The court explained that it still had to decide whether the US Entity’s delay in submitting the catch-up billings was reasonable.  The court quoted prior Pennsylvania decisions holding that:

where a demand is necessary to perfect the cause of action and the time of demand is within the plaintiff’s control, the demand must be made within a reasonable time.  The plaintiff cannot arrest the running of the statute . . . for his own convenience.

If the US Entity’s delay in submitting the two catch-up billings were reasonable, then its claims for recovery of those billings would not be time barred.  If the delay were unreasonable, the billings might be time barred.   The court concluded that a genuine issue of fact existed as to whether the delay was reasonable, and the court therefore denied summary judgment.

Furthermore, because the court held that the standstill agreement applied only to the catch-up billings submitted in July 2005, it granted the UK Entity’s motion for partial summary with respect to any other billings that the US Entity submitted more than four years prior to the commencement of the lawsuit on December 27, 2010.  The court ruled that the US Entity’s claims to recover under any such billings, which included a separate catch-up billing submitted in October 2006, were time barred.

The court denied the US Entity’s motion for summary judgment with respect to the delamination claims and the documentation issue finding that those claims involved genuine issues of material fact.  Those issues, along with the reasonableness of the delay in submitting the catch-up billings in July 2005, will have to be decided at trial.

The court’s ruling provides a cautionary tale for cedents and reinsurers alike.  Application of a statute of limitations is not always a simple issue, and commonly held notions regarding the start date for statute of limitations purposes may not always apply. 

For more information regarding this alert, please contact Daryn Rush (215.864.6360 /rushd@whiteandwilliams.com) or Thomas Klemm (215.864.6341 / klemmt@whiteandwilliams.com).

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This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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