Sumitomo Marine & Fire Ins. Co. v. Cologne Reins. Co.

Issue Discussed: Rescission and Reformation

Submitted by Michele Jacobson, Michael Fernandez

Date Promulgated: February 13, 1990

Sumitomo Marine & Fire Ins. Co. v. Cologne Reins. Co., 75 N.Y. 2d 295 (1990)

Court:  Court of Appeals of New York

Issue Decided:  Whether a cedent’s failure to disclose that the policy it issued extended coverage to incidental nuclear damage was a basis for rescission when the reinsurer had been informed of the risk at the time it issued its cover note?

Key Holdings
Cedent underwrote a one-year commercial property insurance policy for a steel mill which covered, inter alia, “Sudden and accidental Radioactive Contamination.” After writing the policy, the cedent sought facultative reinsurance. The offering telex contained no explicit reference to radioactive contamination coverage. Several weeks after defendant reinsurers accepted a percentage of the insurance risk, radioactive material caused a shutdown the steel mill and caused a business interruption loss that was covered under the insurance policy. The reinsurers were notified of the loss. They nonetheless signed the cover note without reservation. Subsequently, the insurance policy was delivered to the reinsurers. They then proceeded to issue the formal certificates of reinsurance, which contained a nuclear incident exclusion. Following a settlement between the cedent and the insured, the cedent sought payment from its reinsurers. After the reinsurers refused, the cedent commenced the instant action. The reinsurers moved for summary judgment on the ground that the loss was excluded under the reinsurance certificate and that they would not have entered into the reinsurance agreement had the cedent disclosed that the primary policy covered incidental radioactive contamination. The Court of Appeals rejected both arguments. The Court first rejected the reinsurer’s reading of the agreement, finding that incidental radioactive loss was not excluded . The Court next held that the cedent did not violate a disclosure obligation. In so doing, the Court noted that a reinsured is not required to disclose the terms upon which insurance has been granted where it is common that those terms are found in policies of a similar nature. Rather than deciding whether the coverage at issue was common, however, the Court held that there was no disclosure violation because the reinsurer had been informed of the risk prior to signing the cover note and issuing its facultative certificate, therefore waiving any claim of nondisclosure.

Key Takeaways
A reinsurer is charged with notice of the particular risks that are covered under a particular class of insurance policies. A reinsurer that is on notice of a loss prior to the issuance of a reinsurance agreement may be deemed to have waived any claim for rescission.