This document discusses various issues relating to statutes of limitations (SOLs) and notice provisions in insurance and reinsurance contracts. It provides an overview of SOL rules and accrual dates for direct insurance policies and reinsurance contracts. It also discusses how SOL defenses are addressed in reinsurance arbitrations and ways SOLs may be avoided, such as through tolling agreements. The document further examines issues around exhaustion of underlying limits for excess policies and notice requirements in reinsurance contracts.

1. September 15, 2014

3. Stephen Kennedy
Clyde & Co
Thomas Wamser
ACE Group of Companies
Susan Grondine
SEG-D Consulting, LLC
Lee Routledge
SCOR Reinsurance Company

4. • Causes of action concerning insurance and reinsurance contracts are subject to
time limitations set forth in state statutes applicable to contracts generally
• Breach of contract SOLs vary by state
Typically 3 – 6 Years
Outliers 10 or 15 Years
• If other non-contractual causes of action exist,
e.g., tort claims, then different SOLs might apply
See, e.g., AXA Verischerung AG v. New Hampshire Ins. Co., 391 Fed. Appx. 25
(2d Cir. 2010) (holding reinsurer’s claim that it was fraudulently induced to enter
into reinsurance contracts time-barred under applicable six-year SOL)
• Shorter limitation periods may be agreed to in policies
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5. • Point in time that causes of action accrue
under insurance or reinsurance policy
• General rule – at time of the breach or when the loss insured against
becomes due and payable under terms of contract
1. Direct insurance policies
A. Liability policies
i. Refusal to defend
ii. Refusal to indemnify
B. Property policies (refusal to reimburse)
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6. 2. Reinsurance Contracts
Accrual has been interpreted to mean when the reinsurer was notified of and denied
the claim or a reasonable time after the claim is submitted, whichever is earlier.
Continental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996); see also
Transport Ins. Co. v. TIG Ins. Co., 202 Cal. App. 4th 984 (Ct. App. 2012) (noting lower
court followed Stronghold ruling with respect to accrual of reinsurance claim).
Stronghold court rejected reinsurer’s argument that SOL began to run as soon as
cedent paid underlying claim because notice of loss by cedent under contract was
condition precedent to payment. See also OneBeacon Ins. Co. v. Aviva Ins. Ltd., 2013
U.S. Dist. LEXIS 70212 (May 17, 2013).
If loss notice is not a condition precedent, then SOL may begin to run at time cedent
has right to demand payment (not when demand made).
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7. • Most U.S. Reinsurance contracts have arbitration clauses
• Many also have honorable engagement or equity clauses:
- Arbitrators shall interpret contract as
an honorable engagement
- They are relieved of all judicial formalities
- They may abstain from following strict rules of law
- They shall settle any dispute between parties according to an
equitable rather than strictly legal interpretation of contract terms
- They shall make their award with a view to effecting the general purpose of
the contract rather than in accordance
with literal interpretation of language
• What, if any, is the impact of these clauses on issues of SOL?
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• Are SOL defenses asserted in reinsurance arbitrations?
- Too technical and legalistic?
Stronghold court and others have noted that historically reinsurers did not by custom and
practice assert SOL defenses.
What if reinsured fails to assert SOL as against policyholder?
• Certain state arbitration laws permit parties to ask courts, rather than arbitrators, to decide
statute of limitation defenses. See, e.g., NY CPLR §7502; In re ROM Reinsurance Mgt. v.
Continental Ins. Co., 115 A.D.3d 480 (1st Dep’t 2014) (ruling reinsurer’s time bar defense is
issue for court under CPLR §7502 rather than arbitration panel).
• Under Federal Arbitration Act, statute of limitation issues are for arbitrators to decide

9. WAYS IN WHICH SOL MAY BE AVOIDED
• Tolling Agreement
□ Suspends the running of the limitation period
• Statutory Tolling
□ SOL for tort-based claims may be tolled
until tort is discovered or should have
been discovered
• Equitable Tolling
□ Party conceals evidence necessary for
plaintiffs to determine they have claim
□ Where party exercises reasonable due
diligence but unable to bring lawsuit for
reasons beyond its control
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10. • Expiration of SOL not an automatic bar to claim
• Must be asserted as an affirmative defense or may be waived
• Burden on defendant to prove action was not timely commenced
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1. ATTACHMENT POINT OF EXCESS POLICIES AND
REQUIREMENT OF UNDERLYING EXHAUSTION
- Examples of language in excess policies:
i. Excess insurer liable "only after [the underlying insurers] have
paid or have been liable to pay the full amount [of the underlying
limits]".
ii. “Liability for any loss shall attach to the [excess insurers] only
after the Primary and Underlying Excess Insurers shall have duly
admitted liability and shall have paid the full amount of their
respective liability.“

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2. IS ACTUAL PAYMENT OF UNDERLYING LIMITS REQUIRED
TO TRIGGER EXCESS COVERAGE?
• Issue centers on whether courts find exhaustion language ambiguous
A. Finding of ambiguity
Where courts have found language to be ambiguous they have held that
exhaustion by actual payment of underlying limits not required to trigger
excess policies
- Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928)
Policy required "only after all other insurance herein referred to shall have been exhausted in
the payment of claims to the full amount of the express limits of such insurance." Zeig, 23
F.2d at 665.

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Second Circuit found "payment“ to be ambiguous and held that below limit
settlement between insured and primary carrier constituted exhaustion of underlying
policy. Court relied on public policy for its holding: (1) excess carriers have no
interest in whether the insured collected the full amount of underlying limits, as long
as they are not obligated to pay amounts incurred below their attachment point; and
(2) courts should adopt approach favoring settlements.
Several courts have followed Zeig:
Pacific Employers Ins. Co. v. Clean Harbors Envtl. Servs., Inc., 08 C 2180, 2011 WL
813925 (N.D. Ill. Feb. 24, 2011); Maximus, Inc. v. Twin City Fire Ins. Co., 856 F.
Supp. 2d 797, 799 (E.D. Va. 2012); Massachusetts Mut. Life Ins. Co. v. Certain
Underwriters at Lloyd's of London, 2014 WL 3707989 (Del. Super. June 6, 2014).

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B. Finding that exhaustion language is unambiguous
A number of courts have criticized Zeig and/or ruled that full and absolute collection of
underlying limits required before excess policies are triggered; below limits settlements
do not exhaust underlying policies.
See, e.g., Qualcomm, Inc. v. Certain Underwriters at Lloyd's, London, 161 Cal.App.4th
184, 73 Cal.Rptr.3d 770 (2008) Great American Ins. Co. v. Bally Total Fitness Holding
Corp., 2010 WL 2542191 (N.D. Ill. 2010); Citigroup, Inc. v. Fed. Ins. Co., 649 F.3d 367
(5th Cir. 2011); JP Morgan Chase & Co. v. Indian Harbor Ins. Co., 31 Misc.3d 1240(A),
930 N.Y.S.2d 175 (Sup. Ct. N.Y. Cty. 2011) aff'd, 98 A.D.3d 18, 947 N.Y.S.2d 17 (First
Dep't 2012); Forest Laboratories, Inc. v. Arch Ins. Co., 38 Misc.3d 260, 953 N.Y.S.2d
460 (Sup. Ct. N.Y. Cty. 2012), aff'd, 116 A.D.3d 628, 984 N.Y.S.2d 361 (First Dep't
2014).

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3. ARE REINSURERS RAISING ISSUE OF UNDERLYING
EXHAUSTION?
Lexington Ins. Co. v. Tokio Marine & Nichido Fire Ins. Co., 11 CIV. 391 DAB, 2012 WL
1278005 (S.D.N.Y. Mar. 28, 2012) (ruling reinsurer liable for ceding excess insurer’s billings
even though primary insurer’s settlement was below policy underlying limits)
To what extent does Follow-the-Fortunes and Follow-the-Settlements have a bearing on this
issue?

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REINSURANCE CONTRACT NOTICE PROVISIONS
• Purpose of Notice Provisions
i. Permits timely and full evaluation of potential liability
ii. Set reserves
iii. Consider exercising any right to associate
iv. Adjust premiums in light of loss experience
• Breach of Notice Provisions
i. Most courts hold reinsurer must demonstrate prejudice
if cedent violates notice provision
ii. Certain exceptions to the prejudice rule
- Notice provision is a condition precedent to reinsurer’s liability

17. □ Condition precedent language must be clear and express
□ Prompt notice clauses held to be conditions precedent
as a matter of law (See AIU Ins. Co. v. TIG Ins. Co., 2014
U.S. App. LEXIS 16513 (2d Cir. Aug. 27, 2011) (Illinois
law)
- Bad faith
Line of cases holding that cedent’s failure to provide timely
notice may relieve reinsurer from liability without a showing of
prejudice if cedent’s late notice was in bad faith.
Insurance Co. of the State of Pennsylvania v. Argonaut Ins. Co., 2013 U.S. Dist.
LEXIS 110597 (S.D.N.Y. Aug. 6, 2013) (California law)
Granite State Ins. Co. v. Clearwater Ins. Co., 2014 U.S. Dist. LEXIS 44573 (S.D.N.Y.
March 31, 2014) (New York law).
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• How do companies and arbitrators view late notice
issues?
• Do they recognize a bad faith exception to the
general prejudice rule? If so, to what extent?

20.  Stephen M. Kennedy
 Clyde & Co.
 Stephen.kennedy@clydeco.us
 Thomas Wamser
 ACE Group of Companies
 215-640-1783; thomas.wamser@acegroup.com
 Susan Grondine
 SEG-D Consulting LLC
 781-378-1936; segboston@comcast.net
 Lee Routledge
 SCOR Reinsurance Company
 212-884-9633; lroutledge@scor.com