Andrew S. Amer, Rae C. Adams, Simpson Thacher & Bartlett LLP, New York, New York, Plaintiff.
Sean Thomas Keely, Benjamin J.O. Lewis, Pooja Boisture, Hogan Lovells U.S. LLP New York, New York, Defendant.
OPINION AND ORDER
DENISE COTE, District Judge.
In this non-jury action, the plaintiff Insurance Company of the State of Pennsylvania ("ICSOP") sues to enforce the terms of a reinsurance contract against defendant Argonaut Insurance Company ("Argonaut"). In the reinsurance contract, Argonaut agreed to reinsure ICSOP for a portion of an excess insurance policy ICSOP had issued to Kaiser Cement Corporation ("Kaiser"). Following discovery limited to Argonaut's affirmative defense of late notice, the parties cross-moved for summary judgment on this defense.
For the following reasons, Argonaut's motion is granted in part. This Opinion identifies California law as the law which will govern this defense. There is no material issue of fact which precludes a finding that ICSOP breached its contractual obligation to provide timely notice to Argonaut. The obligation to provide notice arose no later than 2002, but ICSOP did not provide notice until 2009. A trial will be held to determine whether Argonaut can demonstrate that it suffered actual and substantial prejudice from the breach, and whether ICSOP's gross negligence or bad faith excuses Argonaut from demonstrating prejudice.
The following facts are undisputed unless otherwise noted. Many years prior to the instant litigation, nonparty Kaiser manufactured products containing asbestos. From 1953 through 1987, Kaiser purchased primary, umbrella, and excess insurance policy coverage from a number of insurance companies.
Primary Insurance Policy
Kaiser acquired comprehensive general liability insurance from Truck Insurance Exchange ("Truck" or "Primary Insurer") through a primary insurance policy that commenced on January 1, 1974 (the "Truck Policy"). The Truck Policy provided coverage through January 1, 1977. It limited Kaiser's recovery to $500, 000 per "occurrence" but contained no aggregate limit on the sums Truck could be required to pay for multiple occurrences during the policy period.
Excess Insurance Policy
Kaiser also acquired excess umbrella insurance from ICSOP ("1974 ICSOP Policy"), a Pennsylvania insurance company with its principal place of business in New York City, for the same policy period as the Truck Policy. The 1974 ICSOP Policy provided socalled "umbrella" coverage above the $500, 000 Truck primary limit up to a limit of $5, 000, 000 per occurrence. Like the Truck Policy, however, the 1974 ICSOP Policy contained no aggregate limit. The 1974 ICSOP Policy was not the only insurance policy issued to Kaiser by an AIG member company. In total, AIG member companies issued over a dozen insurance policies to Kaiser. For the most part, the other policies contained annual aggregate limits.
The 1974 ICSOP Policy was issued to Kaiser by ICSOP's underwriting manager - another AIG company - C.V. Starr & Co. ("C.V. Starr") out of its California office. Thereafter, C.V. Starr, on behalf of ICSOP, requested facultative reinsurance from Argonaut, an Illinois insurance company with its principal place of business in San Antonio, Texas, for the 1974 ICSOP Policy. In response to C.V. Starr's request, Argonaut issued a facultative certificate (the "Facultative Certificate") in which Argonaut agreed to reinsure 20% of the 1974 ICSOP Policy's $5, 000, 000 limit - or, in other words - $1, 000, 000 per occurrence. The policy was issued from Argonaut's then-home office in Menlo Park, California. It was subsequently delivered through the California office of AIG's reinsurance broker Guy Carpenter to C.V. Starr's California Office. In exchange for agreeing to reinsure 20% of the 1974 ICSOP Policy, Argonaut received a proportionate share of the premium paid on that policy.
Under the Facultative Certificate, Argonaut's liability "follow[s] that of [ICSOP]" and "upon receipt of a definite statement of loss" from ICSOP, Argonaut is instructed to "promptly pay its proportion of such loss." Like many reinsurance contracts, the Facultative Certificate requires ICSOP to give prompt notice to Argonaut that its reinsurance obligations may be triggered:
[ICSOP] shall notify [Argonaut] promptly of any occurrence which in the Company's estimate of the value of injuries or damages sought, without regard to liability, might result in judgment in an amount sufficient to involve this certificate of reinsurance. [ICSOP] shall also notify [Argonaut] promptly of any occurrence in respect of which [ICSOP] has created a loss reserve equal to or greater than fifty (50) percent of [ICSOP's] retention specified in Item 3 of the Declarations; or, if this reinsurance applies on a contributing excess basis, when notice of claim is received by the Company.
The Facultative Certificate applies on a "contributing excess" basis, which means that Argonaut's liability "applies proportionately to all loss within" the policy's limit. The Certificate also granted Argonaut the "right to associate" in the defense and control of any claim, suit or proceeding involving the Facultative Certificate:
While the Reinsurer does not undertake to investigate or defend claims or suits, it shall nevertheless have the right and shall be given the opportunity, with the full cooperation of the Company, to associate counsel at its own expense and to join with the Company and its representatives in the defense and control of any claim, suit or proceeding involving this certificate of reinsurance.
1980-1996: Kaiser Asbestos Litigation
As the deleterious effects of asbestos came to light in the 1980s, Kaiser began to face thousands of lawsuits alleging bodily injury and property damage caused by its asbestos-laden products. Truck, as one of four of Kaiser's primary insurers, initially handled many of the asbestos claims asserted against Kaiser. In 1988, Kaiser, Truck, and other insurance carriers attended a meeting to discuss the possibility of a cost-sharing arrangement. Alicia Arencibia ("Arencibia"), an AIG employee, attended the meeting on behalf of National Union Fire, one of Kaiser's primary insurers. Following the meeting, Arencibia wrote an internal memorandum, dated August 8, 1988, which stated that "[f]or those AIG Companies with excess coverage (see attached list) my recommendations are that files be created and reservation of rights be sent out immediately." The 1974 ICSOP Policy was among the policies contained in the list attached to the memorandum.
The following year, in an internal memorandum dated March 28, 1989, Bart Tesoriero, a claims office employee of C.V. Starr, stated that he had reviewed "the various files for Kaiser Cement & Gypsum, " and noted that "no reinsurance notifications [had] been sent by this office." He further stated that "[m]y preliminary evaluations would be that in those periods where we are excess of $500, 000 in underlying coverage we may face a very real possibility of some impairment." Tesoriero attached a list of "open asbestos claims as of March 29, 1989." The list included a claim number for the 1974 ICSOP Policy. Several years later, in 1991, the Toxic Tort Department of AIG sent a "Key Account Summary" of Kaiser claims to AIG management, which stated that "AIG related companies have been put on notice for excess coverage." Despite these documents from the period between 1988 to 1991 which indicate an awareness by C.V. Starr and components of AIG that excess coverage would be affected by asbestos claims against Kaiser, no steps were taken to give notice to Argonaut.
In 1996, AIG created a master claim file for claims against the 1974 ICSOP Policy. The master case file was assigned case number XXX-XXXXXX and the physical file with this case number contained a copy of the 1974 ICSOP Policy and a confirmation from C.V. Starr reflecting details of the reinsurance coverage provided under Argonaut's Facultative Certificate. ICSOP explains that the opening of a claim file is triggered by the receipt of "notice" under a policy. In the present context, this means that, as of 1996, AIG had received notice under the 1974 ICSOP Policy. AIG did not provide notice to Argonaut at this time that it had received notice under a policy.
2001-2009: California Coverage Action
In 2001, Truck notified ICSOP and other excess carriers that its primary limits were exhausted. At this time, ICSOP did not notify Argonaut of the potential impairment of the Facultative Certificate. Truck proceeded to initiate a declaratory judgment action against Kaiser in California state court in order to establish that it owed no further obligation to provide coverage for Kaiser's asbestos claims under its primary policies ("California Coverage Action"). In February 2002, Truck's counsel informed AIG that its excess policies would "definitely be brought into" the Coverage Action between Truck and Kaiser. Two months later, on April 8, 2002, Kaiser filed a cross-complaint against ICSOP and other excess insurers. ICSOP and other AIG member companies were represented in the Coverage Action by the firm of Lynberg & Watkins. In August 2002, an AIG claims handler designated a new "master" claim file for claims against the 1974 ICSOP Policy. Following these events, ICSOP still did not send notice to Argonaut under the Facultative Certificate.
In 2004, Truck filed a motion for summary judgment that sought, among other things, a declaration that the asbestos claims asserted against Kaiser constituted a "single occurrence." Because the 1974 Truck Policy had occurrence limits, but no aggregate limits, a finding that the asbestos claims constituted a single occurrence would dramatically reduce the amount Truck would have to pay on Kaiser's claims before its limits were exhausted. The London Market Insurers, other providers of excess coverage, opposed Truck's motion and argued that each asbestos bodily injury claim constituted a separate occurrence. For its part, Kaiser made submissions to the court that agreed with Truck's position that the asbestos claims constituted a single occurrence, but argued, in the alternative, that the number of occurrences should be limited to two or three occurrences.
Counsel for the AIG member companies, including ICSOP, decided to take no position on Truck's motion. The rationale behind the decision was explained as follows:
The AIG Member Companies took no position on Truck's Motion, as there are inherent conflicts between the umbrella and excess coverage issued by these Companies to Kaiser. Specifically, while most of the excess policies issued by the AIG Member Companies would benefit from a multiple occurrence finding, i.e., by prolonged exhaustion of the primary coverage, the first layer umbrella policies issued by Insurance Company of the State of ...