## Facts

- A subsidiary of Allendale Mutual Insurance Company issued a $48 million primary policy covering a computer-equipment warehouse in France owned/operated by Zenith Data Systems France and Zenith Data Systems Europe.
- Allendale retained $2.5 million and reinsured the balance with London-market reinsurers, including Excess Insurance Co. Ltd. and other subscribing reinsurers.
- The initial reinsurance placement (effective Jan. 1, 1991) was documented by a slip stating the warehouse was “non-sprinklered,” and included a handwritten note that the placement was “subject to recommendations.”
- An engineering survey produced multiple loss-prevention recommendations, including installation of automatic sprinklers consistent with Allendale’s underwriting standards.
- The insureds indicated they would not implement most recommendations, including the sprinkler recommendation.
- The reinsurers did not request the engineering report before renewal and did not condition coverage on receiving the report or on implementing recommendations.
- On June 1, 1991, the parties executed a renewed reinsurance agreement; the renewal continued to describe the warehouse as non-sprinklered but omitted the earlier “subject to recommendations” notation.
- The warehouse was later destroyed by fire; Allendale billed the reinsurers for their share, and the reinsurers refused payment and sought rescission based on alleged nondisclosure and misrepresentation.
- Allendale sued to enforce the reinsurance; the reinsurers asserted rescission and related defenses. The court decided cross-motions for summary judgment.

## Issues

1. Whether the cedent’s duty of utmost good faith required disclosure of the engineering recommendations and the insureds’ refusal to implement them.
2. Whether nondisclosure of those recommendations and responses was material so as to permit rescission of the reinsurance.
3. Whether the initial slip’s “subject to recommendations” notation, and its omission from the renewal slip, created a contractual or continuing disclosure obligation breached by Allendale.

## Decision

- The court rejected the reinsurers’ rescission defense and refused to void the reinsurance for nondisclosure.
- The court held that the engineering recommendations and the insureds’ refusal to adopt them were not materially different from the risk characteristic the reinsurers accepted: a non-sprinklered warehouse.
- The court emphasized that reinsurers knew the warehouse lacked sprinklers, did not request the report, and did not impose recommendation-related conditions at renewal.
- The reinsurance was enforced, leaving reinsurers liable for their proportionate share of the covered loss.

## Legal Principles

- Reinsurance is governed by a duty of utmost good faith requiring the cedent to disclose to reinsurers material facts about the risk that are not already known to, or reasonably available to, the reinsurer.
- A nondisclosure or misrepresentation supports rescission only if it is material—i.e., if truthful disclosure would have led the reinsurer to decline the risk or write it on different terms.
- When a reinsurer knowingly accepts a disclosed risk feature, it generally cannot rescind based on additional information that is consistent with that feature (such as loss-control recommendations addressing the known condition).
- A reinsurer’s failure to request contemplated information, or to condition coverage on receipt or implementation of recommendations, weighs against treating nondisclosure of that information as material.

## Conclusion

The court held that reinsurers could not rescind the reinsurance based on nondisclosure of loss-control recommendations and the insureds’ refusal to implement them where the reinsurers knowingly accepted the key disclosed risk attribute (a non-sprinklered warehouse) and did not require the recommendations or compliance as conditions of coverage.


Allendale Mut. Ins. Co. v. Excess Ins. Co. Ltd., 992 F. Supp. 278 (S.D.N.Y. 1998)