Pacific Employers Ins Co v. Global Reinsurance Corp of Ame , 693 F.3d 417 ( 2012 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
Nos. 11-3234 & 11-3262
_______________
PACIFIC EMPLOYERS INSURANCE COMPANY
Appellant (No. 11-3262)
v.
GLOBAL REINSURANCE CORPORATION
OF AMERICA,
formerly known as Constitution Reinsurance Corporation,
Appellant (No. 11-3234)
_______________
On Appeal from the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civil Action No. 2-09-cv-06055)
District Judge: Honorable Robert F. Kelly
_______________
Argued June 19, 2012
_______________
Before: AMBRO, VANASKIE and VAN ANTWERPEN,
Circuit Judges
(Opinion filed: September 7, 2012)
Carter G. Phillips, Esq. (Argued)
Sidley Austin LLP
1501 K Street, N.W.
Washington, DC 20005
William M. Sneed, Esq.
Jason M. Adler, Esq.
Sidley Austin LLP
One South Dearborn Street
Chicago, IL 60603
Ellen K. Burrows, Esq.
Christine Gellert Russell, Esq.
Brendan Mcquiggan, Esq.
White and Williams LLP
1650 Market Street
One Liberty Plaza, Suite 1800
Philadelphia, PA 19103
Counsel for Pacific Employers Insurance Company
Edward P. Krugman, Esq. (Argued)
S. Penny Windle, Esq.
Cahill, Gordon & Reindel LLP
80 Pine Street
New York, NY 10005
2
Bonny S. Garcha, Esq.
Mark G. Sheridan, Esq.
Bates Carey Nicolaides LLP
191 North Wacker Drive, Suite 2400
Chicago, IL 60606
William F. McDevitt, Esq.
Christie, Pabarue, Mortensen and Young
1880 John F. Kennedy Boulevard, 10th Floor
Philadelphia, PA 19103
Counsel for Global Reinsurance
Corporation of America
_______________
OPINION OF THE COURT
_______________
AMBRO, Circuit Judge
In 1980 Pacific Employers Insurance Company
(―PEIC‖) purchased a certificate of reinsurance (the
―Certificate‖) from Constitution Reinsurance Corporation
(―Constitution‖), the predecessor of Global Reinsurance
Corporation of America (―Global‖). In this case, one
sentence from that Certificate stands in the spotlight. That
sentence reads, ―As a condition precedent, the Company [i.e.,
PEIC] shall promptly provide the Reinsurer [i.e.,
Constitution, now Global] with a definitive statement of loss
on any claim or occurrence reported to the Company and
brought under this Certificate which involves a death, serious
injury or lawsuit.‖
3
When we read this sentence in the context of the entire
Certificate, we agree with the District Court that it is fairly
susceptible to only one reasonable interpretation. PEIC must
provide Global with a definitive statement of loss (―DSOL‖)
on a subset of claims or occurrences, specifically those that
involve a death, serious injury or lawsuit. When must PEIC
do this? We believe it is promptly after someone reports such
a claim or occurrence to it, not promptly after it demands
indemnity from Global. If PEIC dawdles, the consequences
can be severe. PEIC‘s compliance with this provision is a
condition precedent to Global‘s duty to reinsure — that is, its
duty to make indemnity payments relating to the underlying
claim or occurrence — and not merely its duty to make such
payments promptly.
Parting ways with the District Court, we hold that this
provision is enforceable as written. Our choice-of-law
analysis points to New York, not Pennsylvania, law. Under
New York law, when a reinsurance contract expressly
requires a reinsured to provide its reinsurer with prompt
notice of a claim or occurrence as a condition precedent to
coverage and the reinsured fails to do so, that failure excuses
the reinsurer from its duty to perform, regardless whether the
reinsurer suffered prejudice as a result of the late notice. For
these reasons, and because no genuine issue of material fact
remains, we reverse the District Court‘s Final Order and
Judgment and remand with instructions that it enter a
judgment of non-liability in Global‘s favor.
4
I. Factual and Procedural Background
A. Reinsurance Basics
A brief reinsurance primer is in order.1 Put
colloquially, reinsurance is insurance for insurance
companies. A reinsurer agrees to indemnify a reinsured for
certain payments the latter makes under one or more of its
issued policies. In return, the reinsurer receives a share of the
underlying premiums. Ceding a portion of an insured risk
prevents a single catastrophic loss from hurling the reinsured
into insolvency. It also allows the reinsured to invest more
capital or to insure more risks.
The reinsured may be either a primary or an excess
insurer. Both cover policy holders directly, but excess
coverage kicks in only after an insured‘s primary coverage is
exhausted. In contrast, reinsurers do not cover policy holders
directly.2 Instead, they issue ―certificates‖ of reinsurance to
their reinsureds.
1
For a more comprehensive introduction to reinsurance, see
Travelers Cas. & Sur. Co. v. Ins. Co. of N. Am., 609 F.3d 143(3d Cir. 2010); British Ins. Co. of Cayman v. Safety Nat’l
Cas., 335 F.3d 205 (3d Cir. 2003); N. River Ins. Co. v.
CIGNA Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995);
Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co., 594 N.E.2d
571 (N.Y. 1992).
2
A reinsurance certificate may contain a so-called ―cut
through‖ provision that grants insureds a direct right of action
against the reinsurer. See Jurupa Valley Spectrum, LLC v.
Nat’l Indem. Co., 555 F.3d 87, 89 (2d Cir. 2009).
5
There are two basic types of reinsurance: treaty and
facultative.
Under a reinsurance treaty,
the reinsurer agrees to accept an
entire block of business from the
reinsured. Once a treaty is written,
a reinsurer is bound to accept all
of the policies under the block of
business, including those as yet
unwritten. Because a treaty
reinsurer accepts an entire block
of business, it does not assess the
individual risks being reinsured;
rather, it evaluates the overall risk
pool.
Facultative reinsurance
entails the ceding of a particular
risk or policy. Unlike a treaty
reinsurer who must accept all
covered business, the facultative
reinsurer assesses the unique
characteristics of each policy to
determine whether to reinsure the
risk, and at what price. Thus, a
facultative reinsurer retains the
faculty, or option, to accept or
reject any risk.
N. River Ins. Co. v. CIGNA Reinsurance Co., 52 F.3d 1194,
1199 (3d Cir. 1995) (internal citations and quotation marks
omitted).
6
B. Buffalo Forge Purchases Insurance; PEIC
Purchases Reinsurance
Our story begins when the Buffalo Forge Company
(―Buffalo Forge‖), a manufacturing company located
principally in Buffalo, New York, purchased insurance for
itself and its affiliates. First, it bought a ―comprehensive
general liability insurance policy‖ (the ―Primary Policy‖)
from Utica Mutual Insurance Company. That policy had a $1
million limit. It also purchased an ―excess blanket
catastrophe liability policy‖ (the ―Excess Policy‖), with the
same policy period, from PEIC, then a California stock
insurance company located in Los Angeles. The Excess
Policy provided $9 million of coverage in excess of the
Primary Policy‘s $1 million.
Meanwhile, to spread some of the risk of the Excess
Policy, PEIC purchased the Certificate (a facultative
reinsurance contract) from Constitution, a New York
corporation located in New York. Under the Certificate,
PEIC retained the first $1 million of the Excess Policy and
Constitution agreed to reinsure 25% of the next $4 million,
with a $1 million limit.
It does not appear that there was any direct
―negotiation‖ over the Certificate‘s terms and conditions.
While preparing to issue the Excess Policy, PEIC — through
its Buffalo underwriting office — asked a broker in
Minnesota to make inquiries about reinsurance coverage. The
broker then communicated with several reinsurers, including
Constitution. It sent a telex, dated May 30, 1980, to
Constitution in New York to confirm that it was seeking
binding reinsurance effective June 1, 1980, with PEIC
retaining the first $1 million and Constitution reinsuring a
25% share of the next $4 million, in exchange for a $15,000
gross premium. Constitution replied by telex on June 5,
7
1980, confirming its acceptance of PEIC‘s terms. The broker
and Constitution had further exchanges in September 1980
about the payment of premiums and the issuance of the
Certificate. Eventually Constitution caused the Certificate,
according to its signature line, ―to be signed by its President
and Secretary at New York, New York,‖ and sent it to PEIC‘s
broker in Minnesota. In return, PEIC sent Constitution‘s
share of the premiums from Buffalo Forge to PEIC‘s
Minnesota broker, who forwarded it to Constitution in New
York.
To offset further the risk of the Excess Policy, three
other reinsurers also participated in Constitution‘s reinsured
layer. Of the four, two were New York companies, one an
Illinois company, and one a Massachusetts company.
Eighteen and nineteen years after the issuance of the
Certificate, respectively, PEIC and Constitution underwent
corporate reorganization. In 1998, Gerling Global
Reinsurance Corporation acquired Constitution and merged it
into a newly formed corporation that is now Global
Reinsurance Corportion of America, the appellant here. Like
its predecessor, Global is a New York corporation with its
principal place of business in New York. PEIC underwent a
more significant change in 1999. Previously a California
company located in Los Angeles, that year PEIC became a
Pennsylvania corporation with its primary place of business
in Philadelphia.
C. The Terms and Conditions of the Certificate
The Certificate is four pages long and does not contain
an express choice-of-law provision. On the first page, Items
3 and 4 set out the amount of risk retained by PEIC (referred
to as the Company) and the amount of reinsurance accepted
8
by Constitution (referred to as the Reinsurer). Specifically,
they state:
ITEM 3 - COMPANY
RETENTION
THE FIRST $1,000,000
SUBJECT TO FACULTATIVE
REINSURANCE.
ITEM 4 - REINSURANCE
ACCEPTED
$1,000,000 ANY ONE
OCCURRENCE AND IN THE
AGGREGATE WHERE
APPLICABLE PART OF
$4,000,000 WHICH IS EXCESS
OF $1,000,000 WHICH IN
TURN IS EXCESS OF
UNDERLYING INSURANCE.
Item 5 indicates that Constitution‘s ―Basis of Acceptance‖ is
―Excess of Loss,‖ which is later defined to mean that ―[t]he
limit(s) of liability of the Reinsurer, as stated in Item 4 of the
Declarations (Reinsurance Accepted) applies(y) only to that
portion of loss settlement(s) in excess of the applicable
retention of the Company as stated in Item 3 of the
Declarations.‖
The second page is titled ―Reinsuring Agreements and
Conditions.‖ Significantly, the preamble on this page states
the fundamental nature of the agreement:
In consideration of the payment of
the premium, and subject to the
terms, conditions and limits of
9
liability set forth herein and in the
Declarations made a part thereof,
the Reinsurer does hereby
reinsure the ceding company
named in the Declarations (herein
called the Company) in respect of
the Company‘s policy(ies) as
follows:[.]
Following this first sentence, the second page outlines certain
terms and conditions.
Paragraph A contains a ―follow-the-fortunes‖ clause,
linking PEIC‘s liability under the Excess Policy to
Constitution‘s liability under the Certificate, and a ―follow
form‖ clause, importing into the Certificate the terms and
conditions of the Excess Policy ―except when otherwise
specifically provided.‖ It reads in relevant part:
A. . . . The liability of the
Reinsurer, as specified in Item 4
of the Declarations, shall follow
that of the Company and shall be
subject in all respects to all the
terms and conditions of the
Company‘s policy except when
otherwise specifically provided
herein or designated as
nonconcurrent reinsurance in the
Declarations . . . .
Paragraph D describes circumstances in which PEIC
must provide Constitution with certain information about
claims or occurrences reported to it under the Excess Policy.
It also details Constitution‘s ―right to associate.‖ The
paragraph states:
10
D. As a condition precedent, the
Company shall promptly provide
the Reinsurer with a definitive
statement of loss on any claim or
occurrence reported to the
Company and brought under this
Certificate which involves a
death, serious injury or lawsuit.
The Company shall also notify the
Reinsurer promptly of any claim
or occurrence where the Company
has created a loss reserve equal to
(50) percent of the Company‘s
retention. 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 the
Company and its representatives
in the defense and control of any
claim, suit or proceeding
involving this Certificate of
Reinsurance.
Paragraph E explains how a loss settlement affects
Constitution, how PEIC presents reinsurance bills, and how
Constitution pays them. It provides:
E. All loss settlements made by
the Company, provided they are
within the terms and conditions of
this Certificate of Reinsurance,
shall be binding on the Reinsurer.
11
Upon receipt of a definitive
statement of loss, the Reinsurer
shall promptly pay its proportion
of such loss as set forth in the
Declarations. In addition thereto,
the Reinsurer shall pay its
proportion of expenses (other than
office expenses and payments to
any salaried employee) incurred
by the Company in the
investigation and its proportion of
court costs and interest on any
judgment or award, in the ratio
that the Reinsurer‘s loss payment
bears to the Company‘s gross loss
payment . . . .
The Certificate goes on to define the components of a
DSOL, referred to in the first sentence of Paragraph D and the
second of Paragraph E, as ―those parts or portions of the
Company‘s investigative claim file which in the judgment of
the Reinsurer are wholly sufficient for the Reinsurer to
establish adequate loss reserves and determine the
propensities of any loss reported hereunder.‖ Id.D. Buffalo Forge Gives Notice to PEIC; PEIC
Gives Notice to Global
In the early 1990s, claimants across the country began
inundating Buffalo Forge with asbestos-related lawsuits. It
first notified PEIC, its excess carrier, of these claims and suits
in April 2001. By 2004, Buffalo Forge‘s Primary Policy was
exhausted. Beginning in October 2005, PEIC instructed its
broker to keep its reinsurers informed about developments in
the Buffalo Forge matter. PEIC asked its broker to forward
12
billings, notices, and updates to its reinsurers in 2006, 2007,
and 2008, but apparently the broker failed to do so.
Instead, PEIC first told Global, having succeeded
Constitution, about the Buffalo Forge matter in April 2008
when it sent a one-page claim report to Global‘s New York
office. The report did not demand any payment from Global.
It was not until more than a year later, in September 2009,
that PEIC‘s payments under the Excess Policy exceeded its
$1 million retention. Around that time, PEIC sent its first
bill, dated September 2, 2009, for $559,071.67 to Global‘s
New York office through PEIC‘s Minnesota broker. PEIC
also emailed a copy directly to Global. Along with the
billing, PEIC submitted supporting information and portions
of its investigative claim file. On October 6, 2009, Global
responded with a reservation-of-rights letter to PEIC‘s
Philadelphia office that, among other things, requested
additional information and disputed some areas of coverage.
On November 2 and 4, 2009, Global audited PEIC‘s files at
PEIC‘s offices in Philadelphia. During the audit, Global
apparently discovered that PEIC first received notice of the
Buffalo Forge matter in April 2001, yet PEIC did not notify
Global of the Buffalo Forge situation until April 2008. In a
November 11, 2009 letter, Global asserted a late-notice
defense.
E. The District Court Proceedings
In December 2009, PEIC sued Global for breach of
contract, seeking $559,072 and a declaration of its rights.
Global answered, denied liability, and asserted a counterclaim
for its own declaratory relief. Specifically, it sought a
declaration that it had no liability under the Certificate
because PEIC failed to satisfy Paragraph D‘s DSOL
requirement. In the alternative, it sought a declaration that
the Certificate capped its maximum liability at $1 million,
13
inclusive of expenses. Global moved for a judgment on the
pleadings on this issue, and the District Court agreed that the
Certificate‘s $1 million limit is unambiguously inclusive of
expenses.
In May 2011, the District Court denied Global‘s
motion for summary judgment on the Certificate liability
issue. See Pac. Emp’rs Ins. Co. v. Global Reinsurance Corp.
of Am., No. 09-6055, 2011 WL 2003359 (E.D. Pa. May 23,
2011). The Court found that Paragraph D‘s DSOL provision
unambiguously requires PEIC to provide Global with a
DSOL promptly after Buffalo Forge reports a claim or
occurrence involving a death, serious injury, or lawsuit to
PEIC under the Excess Policy, not promptly after Buffalo
Forge reports such a claim to PEIC and PEIC submits a claim
for payment to Global under the Certificate. Further, the
Court found that PEIC‘s compliance with Paragraph D‘s
DSOL provision is unambiguously a condition precedent to
Global‘s obligation to provide reinsurance coverage
altogether, rather than simply a condition precedent to
Global‘s obligation to remit payment promptly.
The Court also addressed whether Paragraph D‘s
DSOL provision is enforceable as written. Global claimed
that New York law applied while PEIC insisted that
Pennsylvania law did. The Court acknowledged, as the
parties agreed, that under New York law when a reinsurance
contract expressly sets prompt notice as a condition precedent
to coverage, a court will enforce the condition as written and
not require the reinsurer to prove prejudice in the event of late
notice. As there was no holding from the Supreme Court of
Pennsylvania directly on point, the District Court ―predict[ed]
that the Pennsylvania Supreme Court would hold [contrary to
New York law] that a reinsurer must prove prejudice to avoid
coverage even where the cedant breached a notice condition
that is a condition precedent.‖ Confronted with a true
14
conflict, the Court conducted a choice-of-law analysis and
concluded that Pennsylvania‘s predicted must-show-prejudice
rule applied. Because Global failed to allege facts to support
a finding of prejudice, the Court ruled that Global could not
succeed under Pennsylvania law.
After the denial of Global‘s motion for summary
judgment, the parties agreed that there were no issues left for
trial and stipulated to entry of a final judgment that embodied
the Court‘s rulings. The Final Order and Judgment decrees
that PEIC shall recover from Global $507,926 plus interest
and that Global must pay all future billings under the
Certificate up to $1 million, inclusive of expenses.
PEIC appeals the District Court‘s interpretation of
Paragraph D‘s DSOL provision and Global challenges the
District Court‘s prediction of Pennsylvania law and its
choice-of-law analysis. PEIC also appeals the Court‘s limit-
of-liability ruling.3
II. Jurisdiction and Standard of Review
The District Court had jurisdiction under 28 U.S.C.
§ 1332(a)(1). We have jurisdiction under 28 U.S.C. § 1291.
We review the District Court‘s denial of summary judgment
embedded in its stipulated Final Order and Judgment de novo
and apply the same standard the District Court applied. See
Viera v. Life Ins. Co. of N. Am., 642 F.3d 407, 413 (3d Cir.
2011). We will reverse if ―there is no genuine dispute as to
3
Because Global is entitled to a judgment of non-liability as a
result of our holding, PEIC‘s limit-of-liability appeal is moot.
Thus we have no occasion to consider the Second Circuit‘s
decision in Bellefonte Reinsurance Co. v. Aetna Cas. & Sur.
Co., 903 F.2d 910 (2d Cir. 1990), which PEIC asserts is much
maligned in the reinsurance industry.
15
any material fact and the movant is entitled to judgment as a
matter of law.‖ Fed. R. Civ. P. 56(a).
III. Interpreting Paragraph D’s DSOL Provision
A. Rules of Interpretation
The division of labor between court and fact-finder
when interpreting a contract, and the basic rules of
interpretation, are well established and do not differ between
New York and Pennsylvania. First, we must determine (as a
matter of law) whether contractual language is ambiguous.
See Kass v. Kass, 696 N.E.2d 174, 180 (N.Y. 1998);
Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 390 (Pa.
1986). If we determine that the language is unambiguous, we
follow its plain meaning. If, however, we conclude that the
language is ambiguous, we leave it to a fact-finder to decide
its meaning. See Ins. Adjustment Bureau, Inc. v. Allstate Ins.,
Inc., 905 A.2d 462, 469 (Pa. 2006); Amusement Bus.
Underwriters v. Am. Int’l Grp., Inc., 489 N.E.2d 729, 732
(N.Y. 1985).
A contract is ambiguous only if it is ―written so
imperfectly that it is susceptible to more than one reasonable
interpretation.‖ Brad H. v. City of New York, 951 N.E.2d
743, 746 (N.Y. 2011); see also Ins. Adjustment Bureau, 905
A.2d at 468-69. The mere fact that the parties do not agree on
the proper construction does not make a contract ambiguous.
See Metzger v. Clifford Realty Corp., 476 A.2d 1, 5 (Pa.
Super. Ct. 1984).
Because ―the law does not assume that the language of
the contract was chosen carelessly,‖ that language is of
paramount importance. Meeting House Kane, Ltd. v. Melso,
628 A.2d 854, 857 (Pa. Super. Ct. 1993). ―The parties have a
right to make their own contract, and it is not the function of
16
the court to rewrite it or give it a construction in conflict with
the accepted and plain meaning of the language used.‖
Bombar v. W. Am. Ins. Co., 932 A.2d 78, 99 (Pa. Super. Ct.
2007). This is not to say that we can be overly myopic.
When determining whether a contract is ambiguous, we must
―examine the entire contract‖ and ―[p]articular words should
be considered, not as if isolated from the context, but [rather,]
in the light of the obligation as a whole and the intention of
the parties as manifested thereby.‖ Kass, 696 N.E.2d at 180-
81 (quoting Atwater & Co. v. Panama R.R. Co., 159 N.E.
418, 418 (N.Y. 1927)). In this regard, ―all provisions in the
agreement will be construed together and each will be given
effect‖ because a court ―will not interpret one provision . . . in
a manner which results in another portion being annulled.‖
Lesko v. Frankford Hosp. Bucks-County, 15 A.3d 337, 342
(Pa. 2011).
B. PEIC’s Duty to Provide a DSOL Promptly
We begin our merits analysis with some common
ground. Recall that Paragraph D‘s first sentence provides:
―As a condition precedent, [PEIC] shall promptly provide
[Global] with a definitive statement of loss on any claim or
occurrence reported to [PEIC] and brought under this
Certificate which involves a death, serious injury or lawsuit.‖
Whatever PEIC‘s obligation might be, it clearly only applies
to (1) a ―claim or occurrence,‖ (2) that is ―reported to
[PEIC],‖ and (3) that ―involves a death, serious injury or
lawsuit.‖
Although the Certificate does not define ―claim‖ or
―occurrence,‖ the parties appear to agree on their meaning. A
―claim,‖ at least as relevant here, is generally a demand for
payment or relief made against the persons or entities covered
by the Excess Policy or a similar demand made against PEIC.
An ―occurrence‖ is defined under the Excess Policy as ―an
17
accident, including continuous or repeated exposure to
conditions, which results in personal injury or property
damage neither expected nor intended from the standpoint of
the insured.‖ J.A. 122. The Certificate does not specify who
must ―report[] to‖ PEIC the referenced claims or occurrences.
But surely the phrase ―claim or occurrence reported to
[PEIC]‖ refers to a claim or occurrence that PEIC‘s insureds
or their representatives report to it under the Excess Policy.
Disagreement begins when we consider when PEIC
must remit a DSOL under Paragraph D. Global says it is
promptly after an insured reports a claim or occurrence
involving a death, serious injury, or lawsuit to PEIC under the
Excess Policy. PEIC says it is promptly after it demands
payment from Global under the Certificate.
The dispute turns, in large part, on the words ―and
brought under this Certificate.‖ According to Global, a claim
or occurrence is ―brought under this Certificate‖ if it is swept
within the general scope of the Certificate‘s reinsurance
coverage, or, put differently, if it is among the types of claims
or occurrences that the Certificate generally covers. The
District Court agreed. See Pac. Emp’rs Ins. Co., 2011 WL
2003359 at *5 (finding that the phrase ―claim or occurrence . .
. brought under this Certificate‖ means ―that which its plain
meaning confers upon it, merely those types of claims which
fall under Global‘s reinsurance coverage‖). As such,
Paragraph D does not require PEIC to provide a DSOL for
any claim or occurrence of a type that the Certificate does not
cover. For example, two pages of the Certificate are devoted
to excluding from reinsurance coverage certain losses and
liabilities relating to ―nuclear energy risks.‖ See J.A. 77.2-.3
(clause titled ―NUCLEAR INCIDENT EXCLUSION
CLAUSE - LIABILITY – REINSURANCE‖). If a claim or
occurrence were reported to PEIC under the Excess Policy
that is excluded from the Certificate by the nuclear incident
18
clause, then Paragraph D would not require PEIC to provide
Global with a DSOL on that claim or occurrence because it is
not ―brought under this Certificate.‖ Importantly, as Global
sees it, whether a claim or occurrence is ―brought under this
Certificate‖ can and must be determined at the time it is
reported to PEIC.
PEIC disagrees, and argues that a ―claim or
occurrence‖ is ―brought under this Certificate‖ only when it
seeks an indemnity payment from Global related to the claim
or occurrence. Here, PEIC did not seek payment from Global
until September 2009.4 Thus, no claim or occurrence was
―brought under this Certificate‖ before then and PEIC had no
duty to provide Global a DSOL.
In a brief, unsigned ―summary order,‖ the Court of
Appeals for the Second Circuit — examining provisions
identical to the first sentence of Paragraph D — held that the
―terms of the reinsurance certificates create ambiguity as to
what event triggers the duty to promptly provide a DSOL.‖
Folksamerica Reinsurance Co. v. Republic Ins. Co., No. 04-
2716-CV, 182 Fed. Appx. 63, 64 (2d Cir. May 26, 2006). If
we were to isolate Paragraph D‘s first sentence and consider
nothing else, we might agree. But when we read that
sentence in the context of the Certificate as a whole,
examining its structure and other provisions, we are
convinced that Global‘s reading is the correct one.
But even before we turn to the Certificate‘s other
provisions, we see that PEIC‘s reading creates problems
within Paragraph D‘s first sentence. As noted, that sentence
is not limited to ―claim[s]‖ reported under the Excess Policy,
4
Global neither concedes nor contests that the materials PEIC
sent in September 2009 were sufficient to meet the
Certificate‘s definition of a DSOL.
19
but rather expressly applies to ―claim[s] or occurrence[s].‖
This confirms that the obligation it imposes comes into play
before PEIC demands payment under the Certificate.
Occurrences (accidents) exist apart from claims (demands for
relief). While some occurrences may ripen into one or more
claims, others may not. If (as PEIC suggests) Paragraph D‘s
DSOL provision applies only after PEIC demands payment
from Global, such a reading becomes nonsensical as applied
to occurrences because it would require a DSOL for an
occurrence only after it became a claim. In other words, if we
accept PEIC‘s reading, the words ―or occurrences‖ in the
Certificate would be superfluous. See Capek v. Devito, 767
A.2d 1047, 1050 (Pa. 2001) (―[A]n interpretation will not be
given to one part of the contract that will annul another part
of it.‖) (quotation marks omitted); Northville Indus. Corp. v.
Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 679 N.E.2d
1044, 1047-48 (N.Y. 1997) (―[C]ourts, in interpreting
policies, should strive to give meaning to every sentence,
clause, and word of a contract of insurance.‖) (quotation
marks and alterations omitted).
Moving to the second sentence of Paragraph D, we
find a second notice obligation that further illuminates the
purpose served by the Paragraph‘s first notice obligation, the
DSOL provision. This sentence moves beyond the subset of
claims or occurrences — those ―involving a death, serious
injury or lawsuit‖ — covered in the first sentence, and instead
reaches ―any‖ claim or occurrence. It provides that PEIC
―shall also notify [Global] promptly of any claim or
occurrence where [PEIC] has created a loss reserve of fifty
(50) percent of [PEIC‘s] retention specified in Item 3 of the
Declarations.‖ Id. (emphases added). Unlike the first
sentence of Paragraph D, the second sentence does not
require PEIC to report a subset of claims or occurrences
immediately after Buffalo Forge reports them under the
Excess Policy. Instead, PEIC must report all claims or
20
occurrences when it creates a loss reserve of 50% ($500,000)
of its $1 million retention. Furthermore, when it notifies
Global that it has reserved beyond the $500,000 trigger point,
PEIC does not have to provide a DSOL.
A logical insurance purpose surfaces for the disparate
treatment of those claims or occurrences that involve ―a
death, serious injury or lawsuit‖ and those that do not. As
noted, under the Certificate PEIC retained the first $1 million
of exposure on its Excess Policy. Thus, some claims or
occurrences reported to PEIC under that policy may be of no
concern to Global because they may not reach into Global‘s
reinsured layer. If a reinsurer had to determine for itself
whether any particular underlying claim or occurrence could
potentially affect it, the system of reinsurance would not work
efficiently. See Unigard Sec. Ins. Co., Inc. v. N. River Ins.
Co., 4 F.3d 1049, 1054 (2d Cir. 1993) (―Reinsurance works
only if the sums of reinsurance premiums are less than the
original insurance premium. . . . For the reinsurance
premiums to be less, reinsurers cannot duplicate the costly but
necessary efforts of the primary insurer in evaluating risks
and handling claims. Reinsurers may thus not have actuarial
expertise, or actively participate in defending ordinary
claims.‖) (citation omitted).
Paragraph D deals with the disparate treatment issue
by setting up for Global the right to divide the labor between
it and PEIC. When a claim or occurrence carries certain
indicia of potential seriousness — namely, the involvement of
―a death, serious injury or lawsuit‖ — Global contracted for
the right to assess for itself whether the matter might develop
into something so significant that it could activate its
reinsured layer. In the absence of such potentially serious
claims or occurrences, Global chose to rely on PEIC‘s
judgment, but with the agreement that after PEIC concludes
that Global‘s layer is in danger of being breached — by
21
setting reserves for itself of 50% of its retention — it must
notify Global of any claim or occurrence reported regardless
whether it involves a death, serious injury or lawsuit.
Why would a reinsurer want to receive a DSOL on a
potentially serious claim or occurrence when it is first
reported to its reinsured rather than when its reinsured
demands indemnity? We discern two reasons. First, as its
definition makes clear, a DSOL allows a reinsurer to
―establish adequate loss reserves and determine the
propensities of any loss reported‖ under the Certificate.
Allowing PEIC to wait until it actually demands payment
under the Certificate undermines this fundamental purpose.
―[E]stablish[ing] adequate loss reserves and determin[ing] the
propensities of any loss reported‖ are anticipatory measures
that allow a reinsurer to forecast and prepare for future losses
and to allocate funds for possible payment. Taking these
steps after PEIC demands payment under the Certificate
would make little sense.5 Second, Global may wish to
5
PEIC raises a side issue about the definition of a DSOL. It
argues that the DSOL requirement is an ―illusory‖ promise.
To be sure, the information required in a DSOL includes a
discretionary element — the information PEIC submits must
be ―in the judgment of [Global] . . . wholly sufficient‖ for
Global to set reserves. But the inclusion of a discretionary
element in a standard of performance does not render the
standard meaningless or unenforceable: PEIC and Global
must exercise their judgment reasonably and in good faith,
and their determinations are subject to review in any
subsequent litigation. See Dalton v. Educ. Testing Serv., 663
N.E.2d 289, 291 (N.Y. 1995) (―Where the contract
contemplates the exercise of discretion, this pledge includes a
promise not to act arbitrarily or irrationally in exercising that
22
exercise its ―right to associate,‖ as guaranteed by the third
sentence of Paragraph D. Permitting PEIC to submit a DSOL
only after it actually demands payment under the Certificate
could wipe out Global‘s contractual right to associate in the
defense and control of claims as they develop. In that case,
Global may not receive notice of a claim until PEIC has
already handled it, depending on whether PEIC created a
50%-of-retention reserve and notified Global accordingly.
Paragraph E imposes another DSOL obligation that,
contrary to PEIC‘s suggestion, fails to undermine Global‘s
interpretation. That Paragraph provides that
[a]ll loss settlements made by
[PEIC], provided they are within
the terms and conditions of the
original policy(ies) and within the
terms and conditions of this
Certificate of Reinsurance, shall
be binding on [Global]. Upon
receipt of a definitive statement of
loss, [Global] shall promptly pay
its proportion of such loss as set
forth in the Declarations.
As PEIC acknowledges, under this provision it must remit a
DSOL when it demands that Global pay the latter‘s
proportion of losses under the Certificate, regardless whether
the underlying claim involved a death, serious injury, or
lawsuit. But this begs the question: If Paragraph E requires
PEIC to send Global a DSOL when PEIC demands any
indemnity for loss payments under the Certificate, then why
does Paragraph D also require a DSOL for a subset of
discretion.‖); Germantown Mfg. Co. v. Rawlinson, 491 A.2d
138, 148 (Pa. Super. 1985).
23
particularly serious underlying claims? The only reasonable
interpretation is that the paragraphs impose two different
obligations that arise at different times. Thus, under
Paragraph D, PEIC must first promptly provide Global with a
DSOL on a subset of claims or occurrences — those
involving ―a death, serious injury or lawsuit‖ — promptly
after they are reported. Then, under Paragraph E, PEIC must
later submit a DSOL when it demands any payment from
Global under the Certificate. If, at that time, PEIC is
demanding payment related to an underlying claim that
involves a death, serious injury, or lawsuit, then it should be
submitting a DSOL for the second time. If the Certificate
only required PEIC to submit a DSOL when it seeks payment
under the Certificate, the first sentence of Paragraph D would
simply be surplusage. To interpret the contract that way
would violate a cardinal rule of contractual interpretation that
counsels against rendering words or provisions meaningless.
See Beal Sav. Bank v. Sommer, 865 N.E.2d 1210, 1213 (N.Y.
2007); Morris v. Am. Liab. & Sur. Co., 185 A. 201, 202 (Pa.
1936).
After a close examination of the Certificate‘s other
provisions, a big-picture look at the Paragraph D DSOL
provision‘s place in the Certificate‘s overall structure
confirms our interpretation. The Certificate‘s terms and
conditions move sequentially through the life of the
reinsurance relationship. First, Paragraphs A, B, and C
establish the reinsurance relationship itself. Next, Paragraph
D describes PEIC‘s duties and obligations from the moment it
receives notice of a claim or occurrence under the Excess
Policy through the investigation of such a claim and the
defense of any lawsuit. Then, Paragraph E details how, if an
underlying claim is resolved by PEIC, it presents reinsurance
bills to Global and how Global pays them. This structure
suggests that the first sentence of Paragraph D — because it
appears in Paragraph D (which addresses the notice and
24
development of claims) and not Paragraph E (which
addresses the presentation and payment of reinsurance bills)
— must create an obligation that is triggered at the time PEIC
receives notice of an underlying claim or occurrence.
After considering every provision of the Certificate
and how they fit together, we conclude that Paragraph D
unambiguously requires PEIC to provide Global with a
DSOL on any claim or occurrence that involves a death,
serious injury or lawsuit promptly after such a claim or
occurrence is reported to it under the Excess Policy.
C. The Consequences for Breach
Having decided what event triggers PEIC‘s obligation
to provide a DSOL under Paragraph D, we turn to what
consequences the Certificate provides for a failure to comply
with that obligation. The District Court found that ―the only
reasonable interpretation‖ of ―[a]s a condition precedent‖ in
the first sentence of Paragraph D is that it creates a
prerequisite to Global‘s duty to provide reinsurance coverage.
Pac. Emp’rs Ins. Co., 2011 WL 2003359 at *4.6 Therefore, if
PEIC does not comply with the DSOL provision, then (under
6
By way of background, a condition precedent — often
referred to simply as a condition — is generally ―an event,
not certain to occur, which must occur, unless its non-
occurrence is excused, before performance under a contract
becomes due.‖ Restatement (Second) of Contracts § 224; see
also Shovel Transfer & Storage, Inc. v. Pa. Liquor Control
Bd., 739 A.2d 133, 139 (Pa. 1999) (―Where a condition has
not been fulfilled, the duty to perform the contract lays
dormant and no damages are due for non-performance.‖)
(quotation marks omitted).
25
the terms of the Certificate) Global is not only excused from
its obligation to remit payment promptly, but it is excused
from its obligation to remit payment at all.
Admittedly, the condition precedent phrase could have
been drafted more clearly. It might have provided, for
example, that ―As a condition precedent to any liability on the
part of Global under this Certificate, . . . .‖ But a contract
does not have to be perfect to be unambiguous. Global‘s
interpretation is, we believe (as did the District court), the
only reasonable one.
To begin, the preamble makes reinsurance coverage,
not just Global‘s duty to remit payment promptly, subject to
the Certificate‘s conditions. Specifically, it provides that
Global ―does hereby reinsure‖ PEIC ―subject to the terms,
conditions, and limits of liability set forth herein.‖ Paragraph
D‘s ―condition precedent‖ — PEIC‘s obligation to remit a
DSOL — is undeniably a ―condition[] set forth‖ in the
Certificate. Thus, PEIC‘s failure to comply with that
condition excuses Global from its promise to ―hereby
reinsure‖ it under the Certificate.
When reading the first sentence of Paragraph D in
context, it becomes even clearer that the consequences for
failing to comply with it must be different in kind than the
consequences for failing to comply with other provisions in
the Certificate. No other provision in the Certificate uses
―condition precedent‖ language. For example, Paragraph D‘s
second provision makes no mention of a ―condition
precedent,‖ and simply provides that ―[PEIC] shall also notify
[Global] promptly of any claim or occurrence where [PEIC]
has created a loss reserve equal to (50) percent of [PEIC‘s]
retention.‖ Thus, while Paragraph D‘s first sentence creates a
condition precedent to coverage, the second (like all other
26
provisions in the Certificate) is an ordinary contractual
covenant the breach of which may entitle Global to damages
but does not automatically forfeit coverage.
Finally, if the ―as a condition precedent‖ language did
anything other than create a condition precedent to coverage,
PEIC could simply wait until presenting a bill for payment
under the Certificate before submitting its first DSOL without
repercussion, and thereby eviscerate Global‘s other
contractual rights. In that case, Global would lose its ―right to
associate‖ and its right to forecast adequate loss reserves and
determine the propensity of losses when serious claims or
occurrences are reported.
IV. Conflicts Analysis
We consider next whether the applicable state law
would either (1) enforce the express condition precedent as
written or (2) require Global to prove that it suffered
prejudice from any late DSOL remittance. Global argues that
New York law applies, and that it would enforce the
Certificate as written without requiring proof of prejudice.
PEIC counters that Pennsylvania law applies, and that it
would require Global to prove prejudice. We agree with
Global.7
7
As a preliminary matter, PEIC insists that Global has
waived its argument that New York law applies. We
disagree. The most cursory of glances at the District Court‘s
opinion reveals that this is not so. The Court mentioned that
―Global argues that New York law should apply, which does
not require a reinsurer to demonstrate prejudice resulting
from late notice but that, in any event, Pennsylvania and New
York law do not conflict on this point.‖ 2011 WL 2003359 at
27
A. The Applicable Choice-of-Law Rules
As a federal court sitting in diversity, we apply the
choice-of-law rules of the forum state, which is Pennsylvania
in this case. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313
U.S. 487, 496 (1941); Amica Mut. Ins. Co. v. Fogel, 656 F.3d
167, 170-71 (3d Cir. 2011). ―Pennsylvania applies the . . .
flexible, ‗interests/contacts‘ methodology to contract choice-
of-law questions.‖ Hammersmith v. TIG Ins. Co., 480 F.3d
220, 226-27 (3d Cir. 2007).
When a contract like the Certificate does not contain
an express choice-of-law provision (or indicate that the
parties implicitly agreed to be bound by a particular state‘s
law), the first step in the analysis is to identify the
jurisdictions whose laws might apply. Id. at 230. As
candidates, the parties offer New York and Pennsylvania.
Next, we must determine the substance of these states‘ laws,
and look for actual, relevant differences between them. Id.―If [the] two jurisdictions‘ laws are the same, then there is no
conflict at all, and a choice of law analysis is unnecessary.‖
*6. The Court goes on to devote half of its opinion to the
choice-of-law issue. Id. at *5-*10. Although we disagree
with the Court‘s analysis, we cannot pretend that it does not
exist. Furthermore, it is an open question whether choice-of-
law issues are waiveable in this Circuit. See Huber v. Taylor,
469 F.3d 67, 75 n.12 (3d Cir. 2006) (noting that we ―have not
adopted a consistent rule regarding whether choice of law
issues are waiveable,‖ and discussing cases in which we ―held
that choice of law questions cannot be waived‖ and another in
which ―we considered the choice of law question waived‖).
As we did in Huber, we decline to resolve this tension
because Global did not waive its argument, even assuming
that it is waiveable.
28
Id. (emphasis in original). If there are actual, relevant
differences between the laws, then we ―examine the
governmental policies underlying each law, and classify the
conflict as a ‗true,‘ ‗false,‘ or an ‗unprovided-for‘ situation.‖
Id. ―A deeper choice of law analysis is necessary only if both
jurisdictions‘ interests would be impaired by the application
of the other‘s laws (i.e., there is a true conflict).‖ Id.(quotation marks and alteration omitted) (emphasis in
original).
B. New York Law
The law of New York is not in dispute. When a
reinsurance contract expressly requires a reinsured to provide
its reinsurer with prompt notice of a claim or occurrence as a
condition precedent to coverage and the reinsured fails to do
so, that failure excuses the reinsurer from its duty to perform,
even if it did not suffer prejudice as a result of the late notice.
To understand New York‘s interests in having this rule apply
here, a brief account of the rule‘s development is necessary.
In Unigard Security Insurance Co. v. North River
Insurance, 594 N.E.2d 571 (N.Y. 1992), the Court of Appeals
of New York addressed how courts should interpret a prompt
notice provision that is not explicitly a condition precedent to
coverage. At that time, New York courts had long applied a
―settled‖ rule of construction to primary insurance contracts:
the notice provision ―operates as a condition precedent and . .
. the insurer need not show prejudice to rely on the defense of
late notice.‖ Id. at 573. They recognized this as a ―limited
exception to two established rules of contract law: (1) . . .
ordinarily one seeking to escape the obligation to perform
under a contract must demonstrate a material breach or
prejudice; and (2) . . . a contractual duty ordinarily will not be
construed as a condition precedent absent clear language
29
showing that the parties intended to make it a condition.‖ Id.(citations omitted).
Before considering whether this no-prejudice-required
exception should apply in the reinsurance context, the
Unigard Court made clear that it was addressing the issue in
the context of the contract before it. Id. at 574. The contract
in that case required the reinsured to provide ―prompt notice .
. . of any occurrence or accident which appear[ed] likely to
involve th[e] reinsurance,‖ but it did not use the words
―condition precedent‖ or any other words indicating an intent
to create a condition precedent. Id. at 572. The Court noted
that ―[t]here is nothing in [the notice provision or elsewhere
in the contract] indicating that the parties intended that the
giving of notice should operate as a condition precedent. If
ordinary rules of contract were applied, the prompt notice
provision in the . . . certificate would not be construed as a
condition precedent.‖ Id. at 573-74 (citation omitted).
With this caveat in mind, the Court pointed to
differences between primary insurance and reinsurance, and
held that a reinsurer must demonstrate how any late notice
caused it prejudice before coverage could be excused. Id. at
575. It considered prompt notice to be ―of substantially less
significance for a reinsurer than for a primary insurer‖
because ―[a] reinsurer is not responsible for providing a
defense, for investigating the claim or for attempting to get
control of the claim in order to effect an early settlement.‖ Id.
at 574. And although late notice may impair a reinsurer‘s
―right to associate,‖ the Court found that such a risk was not
―sufficiently grave to warrant applying a presumption of
prejudice.‖ Id.The Court of Appeals for the Second Circuit has
confirmed that Unigard‘s must-show-prejudice rule is a
default rule of contract construction that parties may contract
30
around with an express condition precedent. See Christiana
Gen. Ins. Corp. of N.Y. v. Great Am. Ins. Co., 979 F.2d 268,
274 (2d Cir. 1992). Citing Unigard, the Second Circuit noted
that ―[f]or a reinsurer to be relieved from its indemnification
obligations because of the reinsured‘s failure to provide
timely notice, absent an express provision in the contract
making prompt notice a condition precedent, it must show
prejudice resulted from the delay.‖ Id. at 274 (emphasis
added); see also Constitution Reinsurance Corp. v. Stonewall
Ins. Co.,980 F.Supp. 124, 130-31 (S.D.N.Y. 1997), aff’d
mem. on opinion below, 192 F.3d 899 (Table) (2d Cir. 1999).
New York‘s rule is rooted in freedom of contract. ―An
express contract for indemnity,‖ like the Certificate, ―remains
a contract[;] [h]ence, the parties are free, within limits of
public policy, to agree upon conditions precedent to suit.‖
Constitution Reinsurance Corp., 980 F.Supp. at 131 (quoting
Continental Cas. Co. v. Stonewall Ins. Co., 77 F.3d 16, 19 (2d
Cir. 1996)).
C. Predicting Pennsylvania Law
The parties do not agree on the law of Pennsylvania.
This is hardly surprising because the Supreme Court of
Pennsylvania has not addressed (1) how a court should
interpret a prompt notice provision in a reinsurance contract
that is not an express condition precedent to coverage or (2)
whether parties may contract around a default must-show-
prejudice rule with an express condition precedent.
In the absence of a controlling opinion from a state‘s
highest court on an issue of state law, we typically predict
how that court would decide the issue. See Nationwide Mut.
Ins. Co. v. Buffetta, 230 F.3d 634, 637 (3d Cir. 2000). When
predicting state law, we ―can . . . give due regard, but not
conclusive effect, to the decisional law of lower state courts.‖
31
Id. But ―[t]he opinions of intermediate appellate state courts
are ‗not to be disregarded by a federal court unless it is
convinced by other persuasive data that the highest court of
the state would decide otherwise.‘‖ Id. (quoting West v.
AT&T Co., 311 U.S. 223, 237 (1940)).
The District Court began with the Supreme Court of
Pennsylvania‘s decision in Brakeman v. Potomac Ins. Co.,
371 A.2d 193 (Pa. 1977). That case addressed late notice in
the primary insurance context, but — unlike Unigard — it did
not announce a default rule of construction; it went further.
Brakeman held that, under a liability insurance policy, late
notice will not relieve an insurer of its coverage obligations
unless it proves that breach of the notice provision caused it
prejudice. Id. at 198. The Court made no exception for
policies that make prompt notice an express condition
precedent to coverage. In fact, the policy at issue provided
that ―[n]o action shall lie against [the insurer] unless, as a
condition precedent thereto, the insured shall have fully
complied with all the terms of th[e] policy.‖ Id. at 195. Thus,
under Brakeman public policy trumps notice provisions that
are express conditions precedent to coverage.
The Brakeman Court jettisoned its insistence on ―the
freedom of private contracts‖ in this context for two reasons.
Id. at 196. First, ―an insurance contract is not a negotiated
agreement; rather its conditions are by and large dictated by
the insurance company to the insured.‖ Id. Specifically, ―an
insured is not able to choose among a variety of insurance
policies materially different with respect to notice
requirements, and a proper analysis requires this reality to be
taken into account.‖ Id. Second, it would be ―unfair to
insureds,‖ and ―unduly severe and inequitable,‖ to allow an
insurance company to accept the insured‘s premiums and then
seek to deny coverage ―unless a sound reason exists for doing
so.‖ Id. at 196-98. A notice provision is not meant ―to
32
provide a technical escape-hatch by which to deny coverage.‖
Id. at 197 (quotation marks omitted).
Only one Pennsylvania case, Ario v. Underwiting
Members of Lloyd’s of London Syndicates, 996 A.2d 588, 598
(Pa. Cmwlth. Ct. 2010), even mentions the prejudice issue in
the reinsurance context. There, the Commonwealth Court
devoted only two sentences to the law on point:
[T]he ―notice-prejudice‖ rule
applies in both Pennsylvania and
New York. See Brakeman v.
Potomac Ins. Co., 371 A.2d 193(1977); see also Unigard Sec. Ins.
Co. v. North River Ins. Co., 594
N.E.2d 571 (1992). Under this
rule, unless the insurer establishes
prejudice resulting from the
insured‘s failure to give notice as
required under the policy, the
insurer cannot avoid its
contractual obligation. Brakeman,
371 A.2d at 198. Unigard, 594
N.E.2d at 573.
Id.8 The Court could not decide whether the reinsurer was
prejudiced on the record before it; thus, it denied summary
judgment. Id. Further diluting any guidance the case offers,
the reinsurance agreement at issue did not contain an express
condition precedent. In fact, it did not contain any notice
requirement at all; the reinsurer argued that the ―follow form‖
provision incorporated the notice requirements from the
underlying direct policy. Id. at 591, 598.
8
As our discussion above demonstrates, Ario‘s account of
New York law is incomplete.
33
Global correctly points out that, under Pennsylvania
law, the invalidation of contract provisions on public policy
grounds is a rare and significant exercise of judicial power.
In the absence of a plain
indication [that a contract
provision is contrary to public
policy] through long
governmental practice or statutory
enactments, or of violations of
obvious ethical or moral
standards, the Court should not
assume to declare contracts
contrary to public policy. The
courts must be content to await
legislative action.
Heller v. Pa. League of Cities & Municipalities, 32 A.3d
1213, 1220-21 (Pa. 2011) (quotation marks and alteration
omitted).
It is only when a given policy is
so obviously for or against the
public health, safety, morals or
welfare that there is a virtual
unanimity of opinion in regard to
it, that a court may constitute
itself the voice of the community
in so declaring [that the contract
provision is against public
policy].
Id. at 1221 (quotation marks omitted).
Still, we suspect that Pennsylvania‘s interest in
preventing technical forfeitures of coverage drops a heavy
34
counterweight. In the primary insurance context, we have
recognized that ―the Brakeman rule applies even to policies
between sophisticated parties.‖ Trustees of the Univ. of Pa. v.
Lexington Ins. Co., 815 F.2d 890, 897 (3d Cir. 1987). In
Trustees, we discerned that ―although a sophisticated
consumer has greater power and experience with which to
negotiate individual terms of an insurance policy, . . .
Brakeman rested above all on the court‘s unwillingness to
permit a forfeiture of insurance protection ‗unless a sound
reason exists for doing so.‘‖ Id. Trustees, however, did not
involve a notice requirement expressed as a condition
precedent. In fact, we made clear that we were not deciding
―whether Pennsylvania courts would enforce an explicit
waiver of Brakeman’s protection by a sophisticated insured.‖
Id. at 897 n.2.
Our suspicion about Pennsylvania law is further
enhanced by our prediction that ―under New Jersey law . . . a
reinsurer must show prejudice in order to prevail on a late
notice defense asserted against its reinsured.‖ British Ins. Co.
of Cayman v. Safety Nat’l Cas., 335 F.3d 205, 207 (3d Cir.
2003) (emphasis added).9 In that case, we acknowledged that
the contract-of-adhesion rationale for a must-show-prejudice
rule does not apply as strongly in the reinsurance context, but
concluded that the fairness rationale does, and ultimately this
carries the day. Admittedly, reinsurance contracts ―do not
bear all the indicia of adhesion endemic in contracts for
9
The notice provision at issue in British Insurance, however,
did not include condition-precedent language. Id. at 207. As
a result, we had no occasion to consider whether parties could
overcome the must-show-prejudice rule with an express
condition precedent to coverage. Still, the decision provides
some insight as to how the Supreme Court of Pennsylvania
might decide the issue before us.
35
primary coverage;‖ and they are ―clearly more in the nature
of indemnity agreements between two sophisticated insurance
companies.‖ Id. at 213. Nonetheless ―[t]he New Jersey
Supreme Court clearly frowns upon literal interpretation of
notice provisions in situations where it results in the insured
forfeiting coverage it has already paid for absent some
countervailing consideration (such as prejudice) on the part of
the insurer that has accepted premiums in return for offering
coverage.‖ Id. at 213. For that reason, we predicted New
Jersey law would still require a showing of prejudice in
reinsurance cases.
British Insurance is consistent with ―the differences in
the contractual undertakings of primary insurers and
reinsurers because notice provisions are significantly less
important to the reinsurer than a primary insurer.‖ Id. Notice
of claims and occurrences in the primary insurance context
―afford[s] the insurer an opportunity to form an intelligent
estimate of its liabilities, to afford it an opportunity to
investigate the claim while witnesses and facts are available
and to prevent fraud and imposition upon it.‖ Id. at 213(quotation marks omitted). In the reinsurance context, it is
the sole obligation of the ceding insurer to investigate,
litigate, settle, or defend claims and, while the reinsurer may
have a ―right to associate,‖ we considered that right
(especially since it is rarely exercised) insufficient to
outweigh New Jersey‘s policy against forfeiture. Id. at 214.
Predicting the substance of state law in the absence of
a controlling opinion from that state‘s highest court is an
uncomfortable consequence of our diversity jurisdiction.
Such speculation intrudes ―on the lawmaking function of that
state court,‖ and creates a ―fundamental incompatibility . . .
with the most basic principles of federalism‖ because ―judges
who are not selected under the state‘s system and who are not
answerable to its constituency are undertaking an inherent
36
state court function.‖ Dolores K. Sloviter, A Federal Judge
Views Diversity Jurisdiction Through the Lens of Federalism,
78 Va. L. Rev. 1671, 1682, 1687 (1992). Our discomfort is
compounded here because the Supreme Court of
Pennsylvania has ―affirmed [its] reticence to throw aside clear
contractual language based on the often formless face of
public policy.‖ Heller, 32 A.3d at 1220 (quotation marks
omitted).
Global suggests that we can minimize the strains on
federalism that an ―Erie guess‖10 would cause by simply
inverting the usual order of the choice-of-law analysis in
those cases where the guesses themselves are ultimately
unnecessary because the analysis calls for the application of
another state‘s well-settled law. We cannot, however,
conduct a proper choice-of-law analysis without forming
some prediction of a candidate state‘s law and its interest in
having that law apply. Given our review of Pennsylvania law
and our precedent, we assume without deciding, solely for the
sake of our choice-of-law analysis, that Pennsylvania would
apply a must-show-prejudice rule to reinsurance contracts,
even when the contract makes the notice provision an express
condition precedent to coverage.
D. Which State’s Law Applies?
Given our assumption about Pennsylvania law, we are
confronted with a true conflict. Applying a must-show-
prejudice rule would promote Pennsylvania‘s assumed
interest in protecting its reinsureds from losing coverage that
they have already paid for in the absence of a sound reason
for doing so. In contrast, applying New York law here would
promote its interest in protecting sophisticated business
10
See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938) (holding
that substantive state law applies in diversity cases).
37
parties‘ freedom to enter into contracts without having their
terms disregarded or rewritten by courts. In this context,
applying one state‘s law would impair the interests of the
other, and there is a true conflict.
Because we assume a true conflict exists, we
―determine which state has the greater interest in the
application of its law.‖ Hammersmith, 480 F.3d at 231(quotation marks omitted). To do so, we use a methodology
that combines the approaches of the Restatement (Second) of
Conflicts of Law and governmental interest analysis. Id. We
begin ―the analysis by assessing each state‘s contacts under
the Second Restatement,‖ and ―turn to § 188(2) (the general
provision governing contracts), which directs us to take the
following contacts into account: (1) the place of contracting;
(2) the place of negotiation of the contract; (3) the place of
performance; (4) the location of the subject matter of the
contract; and (5) the domicile, residence, nationality, place of
incorporation and place of business of the parties.‖ Id. at
232-33.11 This requires ―more than a mere counting of
contacts.‖ Id. at 231 (quotation marks omitted). Instead, ―we
must weigh the contacts on a qualitative scale according to
the policies and interests underlying the particular issue.‖ Id.
(quotation marks omitted).
Here, the precise place of contracting is somewhat
unclear, but New York certainly had a more significant
relationship to the Certificate‘s formation than Pennsylvania
did, given that Pennsylvania had no relationship whatsoever
in 1980. ―[T]he place of contracting is the place where . . .
the last act necessary, under the forum‘s rules of offer and
acceptance, [occurred] to give the contract binding
effect . . . .‖ Restatement (Second) of Conflicts of Law § 188
11
PEIC concedes that § 188 is the proper section of the
Restatement to consider. See PEIC Br. 30.
38
cmt. e. Insurance contracts often designate that place as the
place of delivery Crawford v. Manhattan Life Ins. Co. of
N.Y., 221 A.2d 877,880 (Pa. Super. Ct. 1966). Here,
Constitution delivered the Certificate to PEIC‘s broker in
Minnesota, but the parties do not address whether delivery
was in fact the last act necessary.12 The District Court found
that offer and acceptance became complete in New York
when Constitution confirmed by cable dated June 5, 1980, its
agreement to participate for 25% of the $4 million excess
layer. Thus, ―the place of contract formation was New
York,‖ which ―PEIC concedes . . . is arguably the case.‖
2011 WL 2003359, at *9.
There were no meaningful negotiations concerning the
Certificate. PEIC‘s Minnesota broker exchanged telexes with
Constitution in New York, but the terms and conditions were
never in dispute. Thus, it is difficult to speak at all of a
―place of negotiation.‖
Both possible places of performance that we discussed
in Hammersmith — ―where the premiums are received‖ and
―the state in which notice should have been provided‖ —
point to New York. 480 F.3d at 234, 234 n.13. In this case,
Buffalo Forge sent its premiums under the Excess Policy to
12
For example, the Court of Appeals of New York has
explained that in ―the London market — the Mecca of the
reinsurance world,‖ an exchange of telexes constitutes a
binding agreement, and ―[d]elivery of the original insurance
policy to the reinsurer and issuance by the latter of a formal
certificate of reinsurance may not occur until much later, and
indeed are technically unnecessary for a binding agreement.‖
Sumitomo Marine & Fire Ins. Co., Ltd.-U.S. Branch v.
Cologne Reinsurance Co. of Am., 552 N.E.2d 139, 142 (N.Y.
1990).
39
PEIC‘s broker in Minnesota, which then sent Constitution in
New York its share under the Certificate. As for ―the state in
which notice should have been provided,‖ notice is due where
the entity to be notified is located, which in this case is, and
has always been, New York. Id. at 234. For our purposes, it
is the place of performance.
The subject matter of the Certificate, a contract of
indemnity, is PEIC‘s liability to Buffalo Forge. It is difficult
to pinpoint an actual "location" for such an abstract subject
matter. To the extent it is located anywhere, an insurer's
liability on a policy simply shares a location with the insurer
itself. In that context, the location of the subject matter of the
Certificate is the same as the location of PEIC.
Turning to the location of the parties, we reiterate that
while PEIC is now a Pennsylvania corporation domiciled in
Pennsylvania, it was a California stock insurance company
located in Los Angeles when the Certificate was issued in
1980. PEIC only became a Pennsylvania insurance company
in 1999. In contrast, Constitution was (and Global is) a New
York corporation domiciled in New York.
Having identified the contacts that § 188 deems
important, we calibrate our qualitative scale to ensure that we
weigh the contacts according to the policies and interests
underlying the particular issue before us. Id. at 231.
According to PEIC, ―the issue at hand is the nature of the
obligations imposed by the contract rather than the validity of
the contract.‖ PEIC Br. 34 (quotations and alterations
omitted). The opposite is in fact true. We have already
decided much of the nature of the relevant obligation
imposed, namely Paragraph D‘s DSOL provision. We have
decided when that obligation arises and whether it qualifies as
a condition precedent to coverage or as something else, and
40
we have done so without first conducting a choice-of-law
analysis because the basic rules of interpretation do not differ
between New York and Pennsylvania. What is before us is
whether a prompt notice provision that is expressly stated as a
condition precedent to coverage is valid and enforceable as
written.
With this mind, we acknowledge that the Restatement
(Second) instructs courts to consider various fundamental
principles when conducting a choice-of-law analysis. See
Restatement (Second) of Conflicts of Law § 6(2). When
determining which state has the most significant relationship
to a contract and the issue concerns the validity of a
contractual provision, the protection of the parties‘ justified
expectations is ―of considerable importance.‖ Id. at § 188
cmt. b. This comes as no surprise because ―[p]rotection of
the justified expectations of the parties is the basic policy
underlying the field of contracts.‖ Id. at § 188 cmt. b. When
the validity of a contractual provision is at stake, the parties‘
expectations should be measured from their vantage point at
the time of contracting, because ―[p]arties entering a contract
will expect at the very least, subject perhaps to rare
exceptions, that the provisions of the contract will be binding
upon them.‖ Id. ―Their expectations should not be
disappointed by application of the local law rule of a state
which would strike down the contract or a provision thereof
unless the value of protecting the expectations of the parties is
substantially outweighed in the particular case by the interest
of the state with the invalidating rule in having this rule
applied.‖ Id.
When we use the protection of justified expectations to
adjust the weight of the contacts discussed above, we are
convinced that New York has the most significant
relationship to the Certificate. A New York reinsurer
accepted, in New York, the terms and conditions proposed by
41
a Minnesota broker, acting on behalf of the New York
underwriting office of a California company located in Los
Angeles. At the time, there would have been simply no
reason for the parties to expect that Pennsylvania law would
govern whether particular provisions of the contract they
were entering into were valid as written. Pennsylvania
entered the picture, as a matter of pure happenstance, 19 years
later when PEIC relocated to Pennsylvania. PEIC has not
pointed us to any authority that would justify allowing this
unilateral decision to blur our focus on the facts and the
protection of the parties‘ justified expectations at the time of
contracting.13
Finally, we must consider the ―interests and policies
that may be validly asserted by each jurisdiction.‖
Hammersmith, 480 F.3d at 235 (quotation marks omitted).
New York has an interest in protecting the rights of
sophisticated parties, particularly New York reinsurers and
insurers who operate out of New York offices, to enter into
contracts and to have their terms enforced predictably, with
administrative ease, and without second guesses from the
courts after costly litigation. Our comments in Hammersmith
about New York‘s interest in the primary insurance context in
13
Citing our decision in Amica Mut. Ins. Co. v. Fogel, 656
F.3d 167 (3d Cir. 2011), PEIC claims that we should assess
the parties‘ justified expectations about the validity of
Paragraph D‘s DSOL provision at the time when it moved to
Pennsylvania. Amica holds that when a district court
transfers an action sua sponte under 28 U.S.C. § 1404(a), the
transferor forum‘s choice-of-law rules travel with the action
to the transferee forum. Id. at 169-70. It neither says nor
implies anything about one party‘s post-contract move to
another jurisdiction changing the parties‘ justified
expectations about the validity of their contract provisions.
42
having a need-not-show-prejudice rule are also relevant here:
―New York has decided that requiring strict compliance with
notice provisions is the most effective means of protecting
certain interests of insurance carriers. We will not substitute
our judgment for that of the New York courts by concluding
that a prejudice rule would just as effectively serve these
interests.‖ Id. at 232 n.12.
Pennsylvania has an interest in ensuring that its
cedants receive coverage that they have paid for and that
reinsurers avoid ―technical escape-hatches‖ to coverage in the
absence of prejudice. The District Court also found that
―Pennsylvania has an interest in achieving uniformity in a
situation where the ceding company [like PEIC here] has
ceded portions of its risk to various reinsurers.‖ 2011 WL
2003359 at *10 (citing Ario, 996 A.2d at 596-97). But in this
case, having multiple jurisdictions‘ laws apply to the same
risk is an undesirable consequence entirely of PEIC‘s own
doing. PEIC chose to purchase reinsurance from two New
York companies, an Illinois company, and a Massachusetts
company, rather than four companies from the same
jurisdiction.
Ultimately, while both New York and Pennsylvania
have interests in applying their law here, PEIC has
undermined and lessened Pennsylvania‘s interests and has
failed to persuade us that those interests, even if unimpaired,
substantially outweigh the parties‘ justified expectation that
the provisions of their contract would be valid.
In sum, we conclude that New York has the most
significant relationship to the Certificate and the greater
interest in having its law applied, especially because applying
its law would protect the parties‘ justified expectations at the
time of contracting. Thus, New York‘s law applies and the
Certificate‘s DSOL provision is enforceable as we read it.
43
V. Whether Genuine Issues of Material Fact Remain
Finally, PEIC argues that even if New York law
applies, there are genuine issues of material fact that
nonetheless preclude summary judgment. We disagree.
First, we fail to see how, as PEIC suggests, Global
possibly waived its right to avoid coverage based on any non-
compliance with Paragraph D. According to PEIC, Global
had actual and constructive knowledge of the facts it needed
to make its DSOL argument by April 2008, but did nothing
until October 2009, when it first asserted defenses to
coverage and did not even mention late notice or the DSOL.
Even if this were true, however, Paragraph L of the
Certificate provides that ―[t]he terms of this Certificate of
Reinsurance shall not be waived or changed except by
endorsement issued to form a part hereof, executed by a duly
authorized representative of the Reinsurer.‖ PEIC does not
suggest that such a formal endorsement occurred here or that
this provision of the Certificate is somehow unenforceable.
In fact, it does not mention this provision of the Certificate at
all.
Although it faults Global for ―relying on a non-existent
district court finding that PEIC breached the DSOL
provision‖ and asserts that the question of ―whether [the
DSOL] was breached‖ precludes summary judgment, see
PEIC Br. at 45-47, PEIC does not seriously suggest that, if we
adopt the District Court‘s interpretation of Paragraph D (as
we do), it promptly provided Global with a DSOL. Recall
that Buffalo Forge gave PEIC notice of asbestos-related
claims and lawsuits in April 2001. According to PEIC,
beginning in October 2005 it asked its broker to keep all its
reinsurers informed about the developments in the Buffalo
44
Forge matter throughout PEIC‘s handling of the claim, but it
appears that the broker did not pass the reports on to Global.
According to Global, PEIC first told it about Buffalo Forge in
April 2008. Even under PEIC‘s best case scenario, it would
not have provided a DSOL until four years after Buffalo
Forge notified it of claims or occurrences involving deaths,
serious injuries and lawsuits. PEIC points us to no authority
that suggests such a lengthy delay was ―prompt.‖
VI. Conclusion
We reverse the District Court‘s Final Order and
Judgment, and remand with instructions that the Court enter a
judgment of non-liability in Global‘s favor.
45