Disputes over notice of claim requirements usually involve questions about the timing or content of the notice. A recent notice dispute involving UnitedHealth Group raised neither questions of timing or content; rather, the dispute involved the question of “to whom” the notice must be sent. In an April 25, 2013 opinion (here), District of Minnesota Judge Patrick J. Schlitz, applying Minnesota law, held that in order to satisfy the notice of claim requirements in an excess insurance policy, the notice had to be sent to the insurer's claims department as specified in the policy. Because the policyholder had failed to establish a genuine issue of fact whether the claims department had received the notice of claim, the Court granted summary judgment in favor of the excess insurer.
The dispute over the adequacy of notice arose in the context of a protracted and procedurally complicated action in which UnitedHealth is seeking insurance coverage from its insurers for a series of claims in which the company was involved between December 1998 and December 2000. The company’s primary insurance policy has been exhausted by payment of loss and the company has settled with five of its excess insurers. Four excess insurers remain as defendants.
In his April 25 order, Judge Schlitz considered a number of different motions in the continuing coverage litigation, including the motion for summary judgment of one of the remaining excess insurers, based on its assertion that it had not been provided notice of a claim known as the AMA claim. The AMA claim later settled for $350 million.
The notice provision in the excess insurer’s policy specified that:
It consideration of the premium charged, it is hereby understood and agreed that notice hereunder shall be given in writing to [the excess insurer], Financial Services Claims Department, 175 Water Street, New York, New York 10038 (herewritten the “Insurer”)
(a) The Company or the Insureds shall, as a condition precedent to the obligations of the Insurer under this policy give written notice to the Insurer as soon as practicable during the Policy Period, or during the Extended Reporting Period (if applicable), or [sic] any claim made against the Insureds.
According to the court’s opinion, the parties agreed that UnitedHealth had not provided written notice of claim sent to the specified address. UnitedHealth nevertheless argued that it had satisfied the notice requirements because it had “substantially complied” with the provisions. Judge Schlitz agreed with UnitedHealth that because Minnesota law “generally disfavors technical and narrow objections to the existence of coverage, especially when it comes to matters of notice,” substantial compliance is sufficient to satisfy a “to whom” notice requirement. But, he added, “substantial compliance requires notice that is substantial.”
Judge Schlitz disagreed with UnitedHealth that the “to whom” requirement is satisfied if the company “provides any kind of notice to any kind of agent” of the excess insurer. He found that under the policy’s provisions, the notice requirement “has not been substantially complied with unless the Claims Department received notice of claim – somehow, from someone --- during the policy period.” He added that if an agent of the insurer becomes aware of a claim “but the agent does not work in the Claims Department and does not notify the Claims Department of the claim, then there has not been substantial compliance with the ‘to whom’ requirement.” Judge Schlitz reasoned in that regard that:
“Compiance” with a provision of an insurance policy should not be deemed “substantial” if doing so would defeat the very purpose of the provision. And the very purpose of a “to whom” requirement – its entire reason for existing – is to ensure that notice is provided not just to the insurance company, but to a particular part of the insurance company. A large insurance company has a legitimate reason to require that notice of claim be given to a particular person or department with the company, rather than to any of the company’s thousands of employees and agents scattered around the globe. Otherwise, there is a substantial danger that the “notice” will not be recognized as such and will not serve its function.
Judge Schlitz added that “The Court can conceive of no reason why an insurer … should not be able to protect itself by requiring that notice be given to a particular person or department. And enforcing such a requirement does not place an onerous burden on an insured – particularly an insured such as United, which is itself a huge and sophisticated insurance company, and which has no excuse for failing to send notice of the AMA claim to the Claims Department, as [the excess insurer’s] policy clearly required United to do.” He concluded that in order for UnitedHealth to show that it substantially complied with the notice requirement, it must show that notice of the AMA claim was received by the Claims Department during the policy period.
Judge Schlitz then reviewed the various ways in which UnitedHealth claimed that it had provided notice of the claim. UnitedHealth argued that the AMA claim had been noticed in a monthly loss run report that the company’s broker supplied to the excess insurer and that the loss run report also was attached to UnitedHealth’s renewal insurance application. However, while Judge Schlitz found that there is sufficient evidence from which a jury could find that someone at the excess insurer received the loss runs, there was no evidence that that the loss runs were provided to the claims department.
And while the AMA claim apparently was discussed at a meeting in connection with UnitedHealth’s insurance renewal, there was no evidence that anyone from the excess insurer’s claims department had attended the meeting. Judge Schlitz specifically concluded that there was no evidence to suggest that the excess insurer’s claims department had received information about the AMA claims from the underwriting department.
Judge Schlitz also rejected UnitedHealth’s argument that because it had provided notice of claim to the primary insurer that is owned by the same insurance holding company as the excess insurer asserting the notice defense that the notice requirements had been satisfied.
Because UnitedHealth had “failed to show that there is a genuine issue of fact about whether the Claims Department received notice of the AMA claim during the policy period,” Judge Schlitz granted the excess insurer’s motion for summary judgment.
Judge Schlitz’s conclusion that an insurance notice requirement is not satisfied unless it can be shown that notice has been given to the specific department identified in the notice provision is a cautionary tale for practitioners in this area. In the press of day to day business, it would be far too easy for a notice to be sent to the right company but to a person, location or address other than the one specified in the policy. The clear lesson is that everyone involved in the process of providing notice of claim to needs to help to ensure that notice is sent not just to the correct insurer but also to the correct location – and to the correct location for each of the insurers in an insurance program. The case also underscores the value of having processes to require and obtain acknowledgement of receipt of notice of claim as well.
UnitedHealth’s apparent failure to provide the requisite notice of claim here is a little bit of a mystery. The claim was obviously very serious (or, at a minimum, it became very serious). It is clear from the Court’s opinion that the primary insurer on UnitedHealth’s insurance program was provided with the notice of claim required under its policy. It isn’t explained in the opinion how it came about the notice of claim had been sent to the prmary insurer (and apparentlyto other excess insurers as well) but not to the excess insurer involved in this motion. The court’s reference to the monthly loss runs is a reminder that UnitedHealth is a big, complex company that apparently became involved in a number of claims. The suggestion is that in the hubbub the notice of the AMA claim to this excess insurer somehow slipped through the cracks. Reading between the lines, there may also have been a confusion of or breakdown in responsibilities among the varaious process participants.
There is one aspect of this opinion that I find interesting. There is nothing in Judge Schlitz’s opinion to suggest that the excess insurer was prejudiced in any way by the absence of compliance with the policy’s notice provisions. At least as presented in the court’s opinion, it does not appear that the excess insurer argued that its interests had been prejudiced. The court was concerned only with the question whether or not the policyholder had satisfied the procedural requirements stated in the policy. There is no sense in the opinion of a consideration of a “no harm, no foul” point of view. .
The arguably harsh outcome of this dispute might be more comfortable if the analysis had been accompanied by some suggestion that UnitedHealth’s failure to satisfy the procedural requirements had somehow caused a problem for the excess insurer with reference to the AMA claim. Here’s my concern. Some insurers try to enforce their policies’ notice requirements as if the implementation of the provions were a game of “Mother May I?” On some occasions, some insurers brandish supposed notice issues as if, as a result of the supposed notice defect, they have won the game because the policyholder failed to say “Mother May !?” D&O insurers are of course fully entitled to expect compliance with policy requirements. However, reasonable business considerations should temper the enforcement of the requirements.
Judge Schlitz commented that it was fair to strictly enforce the requirements of the notice provision against a large sophisticated company like UnitedHealth. Whether or not that is true, my concern is that the same analysis as he is applying to a big sophisticated company like UnitedHealth could also be applied to a company that isn’t as big or sophisticated.
In all fairness, however, it should be noted that isn’t a case where a notice of claim as such was sent to the wrong address or the wrong department. Notwithstanding UnitedHealth’s arguments, it looks as if for whatever reason, there really was not a notice of claim as such sent to any address or department. Without that, UnitedHealth was left to argue that various fragments of informatoin about the claim could be shown to have filtered through a complex pattern of interaction between the company and the excess insurer. That was aloways going to present some difficulties for UnitedHealth. The company was not in the best position it could have been in on these issues.
As I said at the outset, this case is a cautionary tale for all of us working in this business. The lesson for all of us is to try to make sure that the notice of claim both goes to the specific address stated in the policy and that it goes to all of the insurers.
Ninth Circuit Reverses District Court Holding That E&O Insurance Policy Exclusion Precluded Coverage: On April 26, 2012, in a terse, unpublished four-page decision, a three judge panel of the Ninth Circuit reversed the district court’s dismissal of an insurance coverage action that Ticketmaster had filed against its error and omissions insurer. A copy of the Ninth Circuit’s opinion can be found here.
The errors and omissions insurance policy provided liability coverage for Ticketmaster for claims arising from the performance or the failure to perform professional services. The policy contained an exclusion, Exclusion E, specifying that the policy does not apply to any claim “based on or arising out of … any dispute involving fees, expenses or costs paid to or charged by the Insured.”
Ticketmaster was sued in a putative class action brought by ticketholders alleging that the company had made false representations regarding UPS delivery fees and order-processing charges for ticket events. Ticketmaster sought to have its E&O insurer defend it in the ticketholder claims. The insurer declined based on Exclusion E. Ticketmaster sued the insurer for breach of contract and bad faith. The district court granted the insurer’s motion for judgment on the pleading. Ticketmaster appealed.
In its April 26 opinion, the Ninth Circuit panel reversed the district court, holding that Exclusion E is “reasonably susceptible of at least two meanings, particularly in light of the Policy’s other 27 exclusions, and is thus ambiguous.” The appellate court identified the two possible meanings: “(i) Exclusion E may refer narrowly to a dispute regarding the monetary amount paid to or charged by Ticketmaster for uncontested services, or (ii) more generally, Exclusion E may refer to any dispute regarding a fee or charge for professional services, including a dispute regarding the relationship between services and the fees charged.”
The appellate court said that the E&O insurer had failed to carry its burden of showing that the second interpretation is the only reasonable one. The court noted that there are at least some allegations in the ticketholders’ action that do not involve the amount charged for uncontested services, such as the allegation that Ticketmaster performed no services in exchange for its order-processing charge. This allegation, the court said, did not dispute the amount charged but rather the relationship between any fee at all and the services provided. This dispute would be precluded by interpretation (ii) of Exclusion E but not interpretation (i).
The Ninth Circuit reversed the district court and reinstated the complaint, including Ticketmaster’s bad faith allegations.
FDIC Files Another Failed Bank Lawsuit and Two More Bank Fail: On April 26, 2013, the FDIC filed yet another lawsuit in its against the directors and officers of a failed bank. In its complaint (here), the FDIC, in its capacity as receiver of the failed Frontier Bank of Everett, Washington, has asserted claims for negligence, gross negligence and breach of fiduciary duty against twelve former directors and officers of the bank. The bank failed on April 20, 2010, so the FDIC filed its action just before the three-year statute of limitations expired.
The FDIC alleges that the defendants breached their duties to the bank by “causing the Bank to violate its own policies and prudent, safe and sound banking practices” in connection with the approval of at least eleven loans between March 2007 and April 2008. The FDIC sees to recover damages “in excess of $46 million.” An April 26, 2013 Puget Sound Business Journal article regarding the FDIC’s new Frontier Bank lawsuit can be found here.
Not only did the FDIC file the lawsuit against the former Frontier Bank directors and officers, but the agency also took over as receiver of two more failed banks on Friday. The two banks are the Douglas County Bank of Douglasville, Georgia and the Parkway Bank of Lenior, North Carolina. Between January 1, 2013 and April 20, 2013, there were only five bank failures total, but just in the last two weeks there have now been five more, for a total of ten so far during 2013. As I recently noted, though it has seemed as if the bank failure wave had just about played itself out, it now appears that there may yet be more bank failures yet to come.
With the failing of the latest lawsuit, the FDIC has now filed a total of 57 lawsuits against the former directors and officers of failed banks, including 13 so far this year alone. As I discussed here, it seems likely there will be more to come, as well.
Speakers’ Corner: On Tuesday, April 30, 2013, I will be participating in Advisen’s Quarterly D&O Claims Trends Webinar. In this free webinar, which will take place at 11:00 am EDT, I will be participating on a panel with Paul Ferrillo of the Weil Gotshal law firm, David Murray of AIG, and Jim Blinn of Advisen. The panel will discuss claims trends and developments during the first quarter of 2013. Registration information for the webinar can be found here.