The well-respected U.S. Second
Circuit Court of Appeals, which sits in New York City, once posed
what it called a "deceptively simple question": "When does a cause
of action for indemnity promised in a reinsurance policy accrue?"
(See Continental Cas. Co. v. Stronghold
Ins. Co., 77 F.3d 16 (2d Cir. 1996).) Stated another way:
How much time does a ceding insurer have to bring a legal claim
against a reinsurer that has not paid what the ceding insurer says
is due under a contract of reinsurance? Because of the nature of
reinsurance, this question is not so simple to answer.
Larry P. Schiffer
Patton Boggs LLP
Before statutes of limitation were enacted, a party could bring
an action at any time while both parties were alive. Because of
the harsh results that can occur when a claim is not pursued for
many years, legislative bodies enacted statutes of limitation to
set an outside time by which one party can sue another party in
court. These statutes protect defendants against stale claims, but
only after a sufficient and reasonable amount of time has elapsed
during which a party with ordinary diligence would be expected to
bring an action. The central idea is to give repose to the affairs
of business and people as a matter of public policy.
This public policy of repose applies to all sorts of disputes,
including contract disputes of which reinsurance disputes are a
species. In New York, parties to a commercial contract (or almost
any contract for that matter) have 6 years to commence a legal action
on that contract unless that contract provides for a shorter time
period. N.Y.C.P.L.R. § 213(2). Some other states have a 4-year contract
statute of limitations.
The real question is not how long the limitations period is,
but when does that limitations period begin to run? New York's procedural
law (N.Y.C.P.L.R. § 203(a)) provides that the time within which
an action must be commenced shall be computed from the time the
cause of action accrued. Of course, when the cause of action accrues
begs the question of when the time period begins to run.
In a typical breach of contract action, the statute of limitations
begins to run upon the breach of that contract by the breaching
party. For example, if the contract requires Party A to deliver
100 widgets in 60 days from the date of the contract, and Party
A fails to deliver the 100 widgets by the 60th day, Party B's time
to sue Party A starts to run on day 61. In reinsurance, it gets
more complicated because of the nature of insurance and the existence
of underlying insurance obligations that must be met before the
reinsurance obligation is triggered.
In a typical reinsurance contract, the ceding insurer pays a
loss on behalf of or to its insured under an insurance policy that
is covered under and subject to the reinsurance contract. Reinsurance
contracts are contracts of indemnity, so typically the ceding insurer
first has to pay the underlying loss and then send the reinsurer
a bill, which is essentially a request for indemnification of the
loss that the ceding insurer has paid (subject to applicable limits
and percentages of participation). But, the reinsurer also has the
right to question the claim being presented to make sure it is a
proper claim under the reinsurance contract. Reinsurers also generally
have a right to inspect or audit the ceding insurers' files, including
the claim file resulting in the loss and the relevant reinsurance
Typically, traditional reinsurance contracts have provisions
that require the ceding insurer to provide premium and loss information
at specified intervals under the reinsurance contract's accounting
requirements. Reinsurance contracts also typically provide that
the net result of the periodic account shall be paid with a specified
time after the provision of the account. (In other words, when premiums
due during the period are compared to losses owed during the period,
the net balance is due either to the ceding insurer or to the reinsurer.)
For example, many reinsurance contracts provide that the ceding
insurer must provide premium and loss accounts to the reinsurer
at 30, 60, or 90 days after the close of the calendar quarter and
that, if there is a net balance due from the reinsurer, it must
be paid within a specified amount of time afterward. Should the
reinsurer fail to pay the net balance (assuming it is due to the
ceding insurer because losses exceed that quarter's premiums) by
the specified time, the ceding insurer's claim for breach of contract
accrues once that payment is overdue.
The simple illustration above, however, is not the cause of the
controversy. Because the reinsurance contract requires multiple
steps before payment is due, determining when the cause of action
for breach of contract accrues is usually not that simple. Consider
the following questions:
A reinsurance contract is a contract. There is no special statute
of limitations for reinsurance contracts, so each state's general
statute of limitations for breach of contract generally will apply.
In Stronghold, the Second Circuit
made it clear that as a contract of indemnity, normal contract conditions
and statutes of limitation apply. The court noted that parties are
free, within the limits of public policy, to agree on conditions
precedent to suit. Citing cases in the insurance arena, the court
found that it was common for insurance policies to include filing
proofs of loss and allowing the insurance company time to investigate
and pay the claim as reasonable conditions. These common conditions,
said the court, have evolved into a rule in insurance cases that
the cause of action accrues when the loss insured against becomes
due and payable. The court stated that it saw "no reason not to
apply the 'due and payable' insurance rule to reinsurance policies."
The question for ceding insurers seeking to avoid a statute of
limitations problem is when are its losses due and payable under
the reinsurance contract? The court in Stronghold
looked at the terms of the reinsurance contract that required the
ceding insurer to report losses to the reinsurer as soon as practicable
and construed that condition to mean that the ceding insurer had
to report any actual losses within a reasonable period of time under
the circumstances. The court also recognized that the ceding insurer
was likely obligated to wait a reasonable time for the reinsurer
to decide whether it would pay and how much.
The Stronghold court held that
the ceding insurer's actual losses were not due and payable until
a reasonable amount of time elapsed after it gave notice of the
losses to its reinsurers. This meant that the ceding insurer's cause
of action accrued—and the New York 6-year contract statute of limitations
began to run—after that reasonable period of time elapsed once notice
was given or when the reinsurer refused to pay, if earlier, but
But, what if the ceding insurer doesn't send the bill? The
Stronghold court recognized this
problem and made it clear that the ceding insurer did not have the
power to put off the running of the statute of limitations indefinitely.
The ceding insurer, said the court, could not unreasonably delay
reporting the losses once incurred to the reinsurers.
A number of courts in various jurisdictions have followed
Stronghold, although the factual
circumstances of each case, including the specifics of the notice
provisions of each reinsurance contract, dictate the ultimate outcome.
Whether a claim brought in arbitration under a reinsurance contract
is barred by the relevant state's statute of limitations is a matter
that is left to the discretion of the arbitrators to determine.
Application of a limitations statute is a procedural issue for the
arbitrators and not an issue of abitrability that typically is only
addressed by the court.
Courts typically will defer to an arbitration panel's final determination
on whether to apply the relevant statute of limitations to claims
raised under a reinsurance contract. If the reinsurance contract
has an honorable engagement clause, it is more likely that the arbitration
panel will look to the overall business intent of the reinsurance
contract and will not bar the ceding insurer's claim on a technical
application of the statute of limitations. But, if the ceding insurer
delayed providing notice of a claim for many years or failed to
commence an arbitration for many years after a reinsurer has denied
a claim, an honorable engagement clause is unlikely to save the
ceding insurer. Nevertheless, because of the vagaries of arbitration
and the discretion given to arbitrators, especially where there
is an honorable engagement clause, it is difficult to predict an
Determining when a ceding insurer's cause of action for breach
of contract accrues sounds like a simple task, but it is not. The
courts have crafted a test recognizing that a demand for payment
followed by a reasonable amount of time to consider the demand must
occur before the ceding insurer's claim of breach of contract can
begin to run. But the test does not allow the ceding insurer to
sit on a claim for an unreasonably long time without demanding payment.
If a reinsurer does not pay a reinsurance claim, the ceding insurer
must act timely to avoid its claim being barred by the statute of
limitations. The trick is figuring out when the clock starts to
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