What Time Is It? Determining the Statute of Limitations in Reinsurance Disputes
Larry Schiffer | February 1, 2012
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.
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.
Breach of Contract
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 billing files.
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 Complications of Accrual
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:
- What if the ceding insurer pays an underlying loss but does not bill the reinsurer for many years? Can the reinsurer subject to New York law claim that it no longer has to pay if more than 6 years have passed?
- Does the ceding insurer's right to indemnification under the reinsurance contract accrue when the ceding insurer merely pays its insured as opposed to billing its reinsurer?
- Does the ceding insurer's right to indemnification accrue only when the reinsurer formally denies the claim?
- What if the ceding insurer presents a claim and the parties go back and forth for more than 6 years examining the loss, seeking information, questioning the claim presentation, or otherwise delaying the claims process? Is the reinsurance claim then barred by the statute of limitations?
- Does the breach of contract claim accrue once the claim is presented by the ceding insurer to the reinsurer or sometime after a reasonable amount of time has expired if the reinsurer has not yet denied the claim?
Statute of Limitations as Applied to Reinsurance Contracts
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 not before.
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.
What about Arbitration?
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 outcome.
Conclusion
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 run.
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