rescission of reinsurance agreements under ny law presented by: peter chaffetz
TRANSCRIPT
Rescission of Reinsurance Agreements Under NY Law
Presented by :
PETER CHAFFETZ
Rescission is a Drastic Remedy• Rescission is an “extraordinary” or
“drastic” remedy
Canfield v. Reynolds, 631 F.2d 169, 178 (2d Cir. 1980); U.S. Postal Service v. Phelps Dodge Refining Corp., 950 F.Supp 504, 514 (E.D.N.Y. 1997); Fidelity & Deposit Co. v. Hudson United Bank, 653 F.2d 766, 774 (3d Cir. 1981); Union Ins. Exch., Inc. v. Gaul, 393 F.2d 151, 154 (7th Cir. 1968)
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G. Mitu Gulati et al., Fraud by Hindsight, 98 NW. U. L. REV. 773, 773-74 (2004), available at http://scholarship.law.cornell.edu/lsrp_papers/26/
Hindsight blurs the distinction between fraud and
mistake. People consistently overstate what could have
been predicted after events have unfolded – a
phenomenon psychologists call the hindsight bias.3
People believe they could have predicted events better
than was actually the case and believe that others
should have been able to predict them. Consequently,
they blame others for failing to have foreseen events
that reasonable people in foresight could not have
foreseen.4
2004Fraud by Hindsight What looks today like fraud, in many circumstances might
have once been nothing more than misplaced optimism.
Fraud by Hindsight
• Misrepresentation or nondisclosure• Of a material fact• On which the reinsurer relied
Elements of Rescission Claim
Christiania General Insurance Corp. v. Great American Insurance Co., 979 F.2d 268, 278 (2d Cir. 1992); CNA Reins. of London Ltd. v. The Home Insurance Co., 1990 WL 3231, at *10 (S.D.N.Y. Jan. 10, 1990); Sumitomo Marine & Fire Ins. Co. v. Cologne Reins. Co., 75 N.Y.2d 295, 303 (1990); Compagnie de Reassurance d’Ile de France v. New England Reinsurance Corp., 57 F.3d 56, 73 (1st Cir. 1995), cert. denied 116 U.S. 1009 (1995)
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Misrepresentation or Nondisclosure
• Duty of utmost good faith (uberrimae fidei)• Cedent has affirmative obligation to disclose
all information material to the risk• Reinsurer does not have to ask questions
Christiania General Insurance Corp. v. Great American Insurance Co., 979 F.2d 268, 278 (2d Cir. 1992); Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2d Cir. 1993); Allendale Mutual Insurance Co. v. Excess Insurance Co., 992 F. Supp. 278, 282 (S.D.N.Y. 1998) (“[The doctrine of utmost good faith] imposes no duty of inquiry upon a reinsurer; rather, the burden is on the reassured to volunteer all material facts.”)
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Misrepresentation does NOT include:
• Future premium estimates or projections, statements of opinion, or statements of future intentions
• Unless they are known to be false when they are made
CNA Reins. of London Ltd. v. The Home Insurance Co., 1990 WL 3231, at *10 (S.D.N.Y. Jan. 10, 1990) (“Under New York law, expressions of opinion cannot form the basis of a claim of misrepresentation.”) (internal citations omitted); John Hancock Property and Casualty Insurance Co. v. Universale Reinsurance Co., 147 F.R.D. 40, 46-47 (S.D.N.Y. 1993) (“Statements concerning future projections are generally not actionable.”); CNA Reins. of London Ltd., 1990 WL 3231, at *10; John Hancock Property, 147 F.R.D. at 47.
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• Facts of which the reinsurer is, or has reason to be, aware
• Standard terms generally found in policies of that nature• Extensive details• Facts that should be understood as a matter of industry
custom and practice• Pricing estimate for the reinsured layer
Cedent is NOT required to disclose:
Christiania General Insurance Corp. v. Great American Insurance Co., 979 F.2d 268, 278 (2d Cir. 1992); Sumitomo Marine & Fire Ins. Co. v. Cologne Reins. Co., 75 N.Y.2d 295, 303 (1990); Puritan Ins. Co. v. Eagle S.S. Co. S.A., 779 F.2d 866, 871 (2d Cir. 1985) (“Minute disclosure of every material circumstance is not required. The assured complies with the rule if he discloses sufficient [data] to call the attention of the underwriter in such a way that, if the latter desires further information, he can ask for it.”); See Compagnie de Reassurance d’Ile de France v. New England Reinsurance Corp., 57 F.3d 56, 73 (1st Cir. 1995), cert. denied 116 U.S. 1009 (1995); Munich Reinsurance America v. American National Insurance Co., 601 Fed. Appx. 122 (3rd Cir. 2015)
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• “Material facts are those that are likely to influence the decisions of underwriters; facts which, had they been revealed by the reinsured, would have either prevented a reinsurer from issuing a policy or prompted a reinsurer to issue it at a higher premium.”
• Evaluated at the time of placement
What is a Material Fact?
Michigan National Bank-Oakland v. American Centennial Insurance Co., 89 N.Y.2d 94, 106 (1996). See also Christiania General Insurance Corp. v. Great American Insurance Co., 979 F.2d 268, 278 (2d Cir. 1992); Christiania, 979 F.2d at 279
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• Objective test – “whether a reasonable insured should have believed the fact was something the insurer would consider material.”
• But if a reinsurer asks questions about certain information, the cedent is deemed to be on notice that such information is material to the reinsurer (i.e. disclosure is required, even if the cedent does not consider the information material)
Test for Materiality
Christiania General Insurance Corp. v. Great American Insurance Co., 979 F.2d 268, 278-79 (2d Cir. 1992); Allendale Mutual Insurance Co. v. Excess Insurance Co., 992 F. Supp. 278, 285 (S.D.N.Y. 1998)
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Reliance• Reinsurer must show that it relied on the
misrepresentation (or failure to provide information) in making its underwriting decision to participate on the reinsurance contract.
See CNA Reins. of London Ltd. v. The Home Insurance Co., 1990 WL 3231, at *11 (S.D.N.Y. Jan. 10, 1990); Puritan Insurance Co. v. Eagle Steamship Co., S.A., 779 F.2d 866 (2d Cir. 1985); Compagnie de Reassurance d’Ile de France v. New England Reinsurance Corp., 57 F.3d 56, 73 (1st Cir. 1995), cert. denied 116 U.S. 1009 (1995); St. Paul Fire & Marine Ins. Co. v. ABHE & Svoboda, Inc., 798 F. 3rd 715 (8th Cir. 2015)
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• Open Question• “A reinsured need not possess a specific intent to conceal
information from a reinsurer to make a contract voidable. . . . an innocent failure to disclose a material fact is sufficient.”
• “[T]hough the failure to disclose need not be fraudulent or even intentional, the party with a duty to disclose must at least have reason to believe the fact not disclosed is material.”
• “[I]f one was aware of a material fact, the failure to disclose it would justify rescission even if the party who failed to make a disclosure did not realize its significance or failed to disclose it for some innocent reason.”
Is Intent Required??
Michigan National Bank-Oakland v. American Centennial Insurance Co., 89 N.Y.2d 94, 107 (1996), quoting Ostrager and Newman, Handbook on Insurance Coverage Disputes, § 16.03[a] (8th ed. 1995); Christiania General Insurance Corp. v. Great American Insurance Co., 979 F.2d 268, 279 (2d Cir. 1992); Nichols v. American Risk Management, Inc., 2002 WL 31556384 (S.D.N.Y. Nov. 18, 2002)
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• “[R]escission to be effective must be announced without unreasonable delay.”
• “Promptness is an element of a prima facie rescission action and the burden of proof is on [the party seeking rescission].”
• “A party wishing to rescind the contract must act reasonably promptly after discovering the facts entitling it to do so.”)
• …Or may be deemed to have waived rescission and/or ratified the contract
Rescission Claims Must be Made Within a Reasonable Time After Discovery or Notice of the Misrepresentation
In re Schick, 232 B.R. 589, 596 (Bankr. S.D.N.Y. 1999) (quoting Schenk v. State Line Tel. Co., 238 N.Y. 308, 313 (1924)); Banque Arabe et Internationale D’Investissement v. Maryland Nat’l Bank, 850 F. Supp. 1199, 1211 (S.D.N.Y. 1994), aff’d 57 F.3d 146 (2d Cir. 1995); Sumitomo Marine & Fire Insurance Co. v. Cologne Reinsurance Co., 75 N.Y.2d 295 (1990); Graydon S. Staring, Law of Reinsurance § 20:3
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• “A waiver is ‘the intentional relinquishment of a known right with both knowledge of its existence and an intention to relinquish it.’”
• “[R]atification arises ‘when a party to a voidable contract accepts benefits flowing from the contract, or remains silent, or acquiesces in contract [sic] for any considerable length of time after he has opportunity to annul or void the contract.’”
Waiver and Ratification
CNA Reins. of London Ltd. v. The Home Insurance Co., 1990 WL 3231, at *9 (S.D.N.Y. Jan. 10, 1990) (quoting City of New York v. State of New York, 40 N.Y.2d 659, 669 (1976); CNA Reins. of London Ltd., 1990 WL 3231 at * 9 (quoting Prudential Insurance Co. v. BMC Industry Inc., 639 F. Supp. 1298, 1300 (S.D.N.Y. 1986))
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• “[A]n insurer that accepts premiums after learning of facts that it believes entitles it to rescind the policy has waived the right to rescind.”
• “[I]ntentional acts, performed in recognition of a contract as valid, result in a ratification of a previously voidable contract and bar rescission.”
• NOTICE: “[K]knowledge which is sufficient to lead a prudent person to inquire about the matter, when it could have been ascertained conveniently, constitutes notice of whatever the inquiry could have disclosed, and will be regarded as knowledge of the facts.” Blumenfeld, 938 N.Y.S.2d at 86.
Actions that constitute waiver or ratification:
Sumitomo Marine & Fire Insurance Co. v. Cologne Reinsurance Co., 75 N.Y.2d 295 (1990); United States Life Ins. Co. v. Blumenfeld, 938 N.Y.S.2d 84, 86 (App. Div. 2012) (collecting cases under NY law); Banque Arabe et Internationale D’Investissement v. Maryland Nat’l Bank, 850 F. Supp. 1199, 1212-13 (S.D.N.Y. 1994)
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• GuideOne Specialty Mutual Insurance Co. v. Congregation Adas Yereim, 593 F.Supp.2d 471, 484 (E.D.N.Y. 2009) (ten month delay in seeking rescission unreasonable)
• United States Life Ins. Co. v. Blumenfeld, 938 N.Y.S.2d 84, 87 (App. Div. 2012) (rejecting rescission claim when insurer had “sufficient knowledge of potential material misrepresentations warranting rescission of the policy” for “more than one year prior to commencing [its] action [for rescission].”
How Much Time Is “Reasonable”?
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