Opinion ID: 808087
Heading Depth: 2
Heading Rank: 3

Heading: Predicting Pennsylvania Law

Text: The parties do not agree on the law of Pennsylvania. This is hardly surprising because the Supreme Court of Pennsylvania has not addressed (1) how a court should interpret a prompt notice provision in a reinsurance contract that is not an express condition precedent to coverage or (2) whether parties may contract around a default must-showprejudice rule with an express condition precedent. In the absence of a controlling opinion from a state‘s highest court on an issue of state law, we typically predict how that court would decide the issue. See Nationwide Mut. Ins. Co. v. Buffetta, 230 F.3d 634, 637 (3d Cir. 2000). When predicting state law, we ―can . . . give due regard, but not conclusive effect, to the decisional law of lower state courts.‖ 31 Id. But ―[t]he opinions of intermediate appellate state courts are ‗not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise.‘‖ Id. (quoting West v. AT&T Co., 311 U.S. 223, 237 (1940)). The District Court began with the Supreme Court of Pennsylvania‘s decision in Brakeman v. Potomac Ins. Co., 371 A.2d 193 (Pa. 1977). That case addressed late notice in the primary insurance context, but — unlike Unigard — it did not announce a default rule of construction; it went further. Brakeman held that, under a liability insurance policy, late notice will not relieve an insurer of its coverage obligations unless it proves that breach of the notice provision caused it prejudice. Id. at 198. The Court made no exception for policies that make prompt notice an express condition precedent to coverage. In fact, the policy at issue provided that ―[n]o action shall lie against [the insurer] unless, as a condition precedent thereto, the insured shall have fully complied with all the terms of th[e] policy.‖ Id. at 195. Thus, under Brakeman public policy trumps notice provisions that are express conditions precedent to coverage. The Brakeman Court jettisoned its insistence on ―the freedom of private contracts‖ in this context for two reasons. Id. at 196. First, ―an insurance contract is not a negotiated agreement; rather its conditions are by and large dictated by the insurance company to the insured.‖ Id. Specifically, ―an insured is not able to choose among a variety of insurance policies materially different with respect to notice requirements, and a proper analysis requires this reality to be taken into account.‖ Id. Second, it would be ―unfair to insureds,‖ and ―unduly severe and inequitable,‖ to allow an insurance company to accept the insured‘s premiums and then seek to deny coverage ―unless a sound reason exists for doing so.‖ Id. at 196-98. A notice provision is not meant ―to 32 provide a technical escape-hatch by which to deny coverage.‖ Id. at 197 (quotation marks omitted). Only one Pennsylvania case, Ario v. Underwiting Members of Lloyd’s of London Syndicates, 996 A.2d 588, 598 (Pa. Cmwlth. Ct. 2010), even mentions the prejudice issue in the reinsurance context. There, the Commonwealth Court devoted only two sentences to the law on point: [T]he ―notice-prejudice‖ rule applies in both Pennsylvania and New York. See Brakeman v. Potomac Ins. Co., 371 A.2d 193 (1977); see also Unigard Sec. Ins. Co. v. North River Ins. Co., 594 N.E.2d 571 (1992). Under this rule, unless the insurer establishes prejudice resulting from the insured‘s failure to give notice as required under the policy, the insurer cannot avoid its contractual obligation. Brakeman, 371 A.2d at 198. Unigard, 594 N.E.2d at 573. Id.8 The Court could not decide whether the reinsurer was prejudiced on the record before it; thus, it denied summary judgment. Id. Further diluting any guidance the case offers, the reinsurance agreement at issue did not contain an express condition precedent. In fact, it did not contain any notice requirement at all; the reinsurer argued that the ―follow form‖ provision incorporated the notice requirements from the underlying direct policy. Id. at 591, 598. 8 As our discussion above demonstrates, Ario‘s account of New York law is incomplete. 33 Global correctly points out that, under Pennsylvania law, the invalidation of contract provisions on public policy grounds is a rare and significant exercise of judicial power. In the absence of a plain indication [that a contract provision is contrary to public policy] through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts contrary to public policy. The courts must be content to await legislative action. Heller v. Pa. League of Cities & Municipalities, 32 A.3d 1213, 1220-21 (Pa. 2011) (quotation marks and alteration omitted). It is only when a given policy is so obviously for or against the public health, safety, morals or welfare that there is a virtual unanimity of opinion in regard to it, that a court may constitute itself the voice of the community in so declaring [that the contract provision is against public policy]. Id. at 1221 (quotation marks omitted). Still, we suspect that Pennsylvania‘s interest in preventing technical forfeitures of coverage drops a heavy 34 counterweight. In the primary insurance context, we have recognized that ―the Brakeman rule applies even to policies between sophisticated parties.‖ Trustees of the Univ. of Pa. v. Lexington Ins. Co., 815 F.2d 890, 897 (3d Cir. 1987). In Trustees, we discerned that ―although a sophisticated consumer has greater power and experience with which to negotiate individual terms of an insurance policy, . . . Brakeman rested above all on the court‘s unwillingness to permit a forfeiture of insurance protection ‗unless a sound reason exists for doing so.‘‖ Id. Trustees, however, did not involve a notice requirement expressed as a condition precedent. In fact, we made clear that we were not deciding ―whether Pennsylvania courts would enforce an explicit waiver of Brakeman’s protection by a sophisticated insured.‖ Id. at 897 n.2. Our suspicion about Pennsylvania law is further enhanced by our prediction that ―under New Jersey law . . . a reinsurer must show prejudice in order to prevail on a late notice defense asserted against its reinsured.‖ British Ins. Co. of Cayman v. Safety Nat’l Cas., 335 F.3d 205, 207 (3d Cir. 2003) (emphasis added).9 In that case, we acknowledged that the contract-of-adhesion rationale for a must-show-prejudice rule does not apply as strongly in the reinsurance context, but concluded that the fairness rationale does, and ultimately this carries the day. Admittedly, reinsurance contracts ―do not bear all the indicia of adhesion endemic in contracts for 9 The notice provision at issue in British Insurance, however, did not include condition-precedent language. Id. at 207. As a result, we had no occasion to consider whether parties could overcome the must-show-prejudice rule with an express condition precedent to coverage. Still, the decision provides some insight as to how the Supreme Court of Pennsylvania might decide the issue before us. 35 primary coverage;‖ and they are ―clearly more in the nature of indemnity agreements between two sophisticated insurance companies.‖ Id. at 213. Nonetheless ―[t]he New Jersey Supreme Court clearly frowns upon literal interpretation of notice provisions in situations where it results in the insured forfeiting coverage it has already paid for absent some countervailing consideration (such as prejudice) on the part of the insurer that has accepted premiums in return for offering coverage.‖ Id. at 213. For that reason, we predicted New Jersey law would still require a showing of prejudice in reinsurance cases. British Insurance is consistent with ―the differences in the contractual undertakings of primary insurers and reinsurers because notice provisions are significantly less important to the reinsurer than a primary insurer.‖ Id. Notice of claims and occurrences in the primary insurance context ―afford[s] the insurer an opportunity to form an intelligent estimate of its liabilities, to afford it an opportunity to investigate the claim while witnesses and facts are available and to prevent fraud and imposition upon it.‖ Id. at 213 (quotation marks omitted). In the reinsurance context, it is the sole obligation of the ceding insurer to investigate, litigate, settle, or defend claims and, while the reinsurer may have a ―right to associate,‖ we considered that right (especially since it is rarely exercised) insufficient to outweigh New Jersey‘s policy against forfeiture. Id. at 214. Predicting the substance of state law in the absence of a controlling opinion from that state‘s highest court is an uncomfortable consequence of our diversity jurisdiction. Such speculation intrudes ―on the lawmaking function of that state court,‖ and creates a ―fundamental incompatibility . . . with the most basic principles of federalism‖ because ―judges who are not selected under the state‘s system and who are not answerable to its constituency are undertaking an inherent 36 state court function.‖ Dolores K. Sloviter, A Federal Judge Views Diversity Jurisdiction Through the Lens of Federalism, 78 Va. L. Rev. 1671, 1682, 1687 (1992). Our discomfort is compounded here because the Supreme Court of Pennsylvania has ―affirmed [its] reticence to throw aside clear contractual language based on the often formless face of public policy.‖ Heller, 32 A.3d at 1220 (quotation marks omitted). Global suggests that we can minimize the strains on federalism that an ―Erie guess‖10 would cause by simply inverting the usual order of the choice-of-law analysis in those cases where the guesses themselves are ultimately unnecessary because the analysis calls for the application of another state‘s well-settled law. We cannot, however, conduct a proper choice-of-law analysis without forming some prediction of a candidate state‘s law and its interest in having that law apply. Given our review of Pennsylvania law and our precedent, we assume without deciding, solely for the sake of our choice-of-law analysis, that Pennsylvania would apply a must-show-prejudice rule to reinsurance contracts, even when the contract makes the notice provision an express condition precedent to coverage.