court confuses insurance policy for reinsurance contract in determining when cause of action arises | White and Williams LLP


In a recent ruling dismissing claims against a worker’s compensation insurer for statute of limitations, a New York City trial court briefly addressed the often confusing question of when a cause of action arises for breach of insurance contracts. and reinsurance. Unfortunately, the court incorrectly characterized the insurance policy as a contract of reinsurance and did not fully analyze the issue of accrual accounting.

In New York Bus Operators Compensation Trust v. American Home Assurance Company, a trust created to self-insure the workers’ compensation liabilities of participating school and charter bus companies (the Trust) sued American Home, which issued an accident compensation policy Labor and Employer Liability Providing Coverage Fixing the Trust’s $ 150,000 Surplus for Each Accident Retention. A bus driver from one of the member companies was injured in an accident in 1999. She returned to work a month later, but in July 2005 she had to undergo surgery for her injuries, was dismissed. as having permanent partial disability and never returned to work. By April 2007, the Trust had exhausted its self-insured retention of $ 150,000. Two different third-party administrators (TPAs) failed to notify American Home of the loss, and the Trust continued to pay the benefits. A third TPA ultimately provided notice on February 27, 2012. In a letter to the APT dated May 18, 2012, American Home denied coverage due to late notice.

The Trust first learned of American Home’s denial in August 2016. A year later, the Trust sued all three APTs, but not American Home. In 2020, the Trust commenced a declaratory judgment and breach of contract action against American Home. American Home decided to dismiss the complaint on the grounds that both counts were barred by New York’s six-year limitation period. American Home argued that the Trust’s claims accrued in April 2007, when the Trust exhausted its retention of $ 150,000, or, no later than May 18, 2012, when American Home denied coverage. Even using the latest date, the Trust’s complaint was over two years late. The Trust argued that because the policy provides for continued performance over time (that is to say, periodic payments), the limitation period is valid until the last wrongful act or at least does not exclude claims for payments which became due for the first time in the six years preceding the filing of the action.

After dismissing the Trust’s “false continuing” arguments (a matter for another day), the court considered the Trust’s attempt “to avoid the limitation period by characterizing the parties’ agreement as a contract of indemnity rather than of insurance contract ”. Aside from the fact that the court’s opinion appears to distort the Trust’s argument regarding compensation, the court’s analysis of the alleged argument is confused and flawed.

First, although the contract in question is clearly a Assurance policy (neither party suggested otherwise), the tribunal concluded that “[e]Stop Loss Insurance is a type of reinsurance [] which has been used, as here, by self-insured employers to meet certain state workers’ compensation insurance requirements. Although there are circumstances in which non-traditional risk-bearing entities, such as joint authorities, obtain greater coverage than retentions through reinsurance contracts, the Trust has purchased insurance, not insurance. reinsurance. Further, although the court identified two authorities to support its conclusion, those authorities are simply defending the trite proposition that reinsurance can be used by self-insurers to meet legal requirements for accident compensation. work.

Second, having concluded that the policy was a contract of reinsurance, the court explained how insurance and reinsurance contracts are different, but then ruled that the difference did not matter in determining when a cause of action accumulates. The court is partly right. Unlike the typical insurance policy, a reinsurance contract is, in most cases, a contract of indemnity and not of liability. But the court did not understand the significance of this distinction – that is to say, reinsurers often argue that since reinsurance is a contract of indemnity, the reinsured’s cause of action accumulates when he pays the underlying claim (and therefore is entitled to compensation), not when the reinsurer denies the reinsurance claim. While this approach is well established in UK law, the law in most US states remains largely unstable. The small case law that exists in the United States generally maintains that in the absence of a specific contractual clause identifying when payment is due (for example, upon receipt of proof of loss), the reinsured’s cause of action arises when the reinsurer denies the claim or fails to pay within a reasonable time.

When a cause of action arises in insurance and reinsurance contracts, it is a complex issue that is specific to the facts and requires careful and careful analysis. The notice in New York Bus Operators Compensation Trust v. American Home Assurance Company does not provide such analysis and is a good example of how courts can be confused by complex concepts, practices and issues of (re) insurance.

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