(Article from Insurance Law Alert, April 2024)
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Holding
A Texas district court granted a cedent’s summary judgment motion, ruling that it did not breach a notice provision in a reinsurance treaty and that the reinsurer was therefore obligated to pay a portion of an underlying settlement. United States Fire Ins. Co. v. Unified Life Ins. Co., 2024 U.S. Dist. LEXIS 58560 (N.D. Tex. Mar. 29, 2024).
Background
Pursuant to a quota share reinsurance agreement between Unified Life and United State Fire Insurance (“USF”), USF agreed to accept 50% of Unified’s “Net Loss” and to cover any “Extra Contractual Obligations” arising from claims incurred under certain medical insurance policies issued by Unified. The treaty provided that Unified “shall . . . advise the Reinsurer promptly of all Claims which, in the opinion of [Unified], may result in a Claim hereunder and of all subsequent developments thereto which, in the opinion of [Unified], may materially affect the position of the Reinsurers.”
The reinsurance dispute arose out of a 2017 lawsuit filed by Butler, a policyholder, against Unified, alleging improper claims handling. In 2018, after the expiration of the deadline to amend pleadings, Butler filed a motion for leave to file an amended complaint, which sought to add a class action claim on behalf of all Unified policyholders. A Montana district court granted leave to amend. In 2019, a magistrate judge recommended granting summary judgment on Butler’s individual breach of contract claim, but denying class certification. The district court granted Butler partial summary judgment on his individual claim, but rejected the magistrate judge’s recommendation regarding the class claim and granted the motion for class certification. Unified sought interlocutory review from the Ninth Circuit, which denied the request. One month after the Ninth Circuit denied the request, Unified notified USF of the Butler litigation.
The Butler litigation was ultimately settled for $8 million, and Unified sought payment from USF for its share of the settlement. USF refused to pay and sought a declaration that Unified provided unreasonably late notice of the Butler litigation and that USF therefore had no duty to pay. Both parties moved for summary judgment and the court ruled in Unified’s favor.
Decision
The court ruled that Unified complied with its obligations under the treaty’s notice provision. The court reasoned that the treaty does not require prompt notice “in the abstract.” Rather, the notice obligation arises only when—in Unified’s subjective opinion—the underlying litigation might result in a claim under the treaty. Further, the court held that Unified had no such subjective belief until the Ninth Circuit denied its request for interlocutory appellate review. Prior to that point, “Unified subjectively believed that the Butler litigation was meritless and would not result in a reinsurance claim.”
The court rejected USF’s contention that it had no obligation to pay because notice was “unreasonably late.” In support of that assertion, USF argued that, because the quota-share treaty provided coverage to the first dollar of liability, Unified should have provided notice when Butler filed the initial complaint in 2017 and when Unified began incurring legal expenses. Rejecting this argument, the court explained that the notice provision failed to include any reasonableness requirement and that under Texas law, courts must be wary of implying unwritten terms into a contract.
Further, the court ruled that even if Unified had provided late notice, USF’s late-notice defense would fail because USF was not prejudiced by any late notice. As a preliminary matter, the court rejected USF’s contention that it need not establish prejudice because Unified acted in bad faith, finding no factual support for that assertion. Turning to the existence of prejudice, the court held that a showing of “actual prejudice” is required—i.e., a “substantial likelihood of avoiding or minimizing the covered loss [had the insured provided earlier notice].” The court concluded that USF failed to meet this standard because it had notice of the litigation well before the settlement and in time to at least partially contribute to Unified’s defense.
Comments
With respect to the issue of prejudice, the court employed a stringent standard. USF offered specific bases substantiating its claims of prejudice, including the loss of ability to recommend expert witnesses to support Unified’s claims handling practices in the Butler litigation. Even construing the facts in USF’s favor, the court rejected USF’s argument, finding that it raised, at most, a genuine issue of fact as to “theoretical prejudice” rather than “actual prejudice.” However, that finding was likely driven, at least in part, by the particular factual record in this case, including the fact that Unified (who had ultimate control over the underlying defense) had originally considered utilizing such experts even prior to notifying USF, but had ultimately decided against it. As such, in other cases with different factual records, the inability to recommend expert witnesses or contribute to other strategic decisions in the defense of an underlying claim may be deemed to constitute actual prejudice.
Finally, the court acknowledged the absence of authority as to whether Texas law requires prejudice in context of reinsurance, as opposed to direct insurance, but “discern[ed] no rationale for treating reinsurers differently than insurers in the context of asserting a late notice defense.” This view appears to align with the majority of courts that have addressed this issue in the reinsurance context. However, such reasoning would be inapplicable to reinsurance agreements that include condition-precedent notice language.