Everyone involved with D&O insurance knows that it is important to keep up with case law developments, in order to appreciate how courts are interpreting and applying various policy terms and conditions. But sometimes there is an additional reason why it is a good to keep up with court decisions – sometimes the cases provide practical lessons in the form of cautionary tales. That was certainly the case in a recent decision in which the Sixth Circuit, applying Kentucky law, affirmed a lower court ruling that late notice of claim precluded coverage under an excess D&O insurance policy. The policyholder had provided timely notice of claim to the primary carrier, but failed to provide notice to the excess carrier until six months after the policy had expired. The court’s conclusion that the late notice precluded coverage under the excess policy may not be surprising, but nevertheless the practical lesson – that is, that notice of claim should be provided to all of the carriers in the D&O insurance program – is an important one, as discussed further below. A copy of the Sixth Circuit’s February 29, 2016 opinion can be found here.
During the policy period of October 1, 2010 through October 1, 2011, Ashland Hospital Corporation had a D&O insurance policy program that consisted of a primary $15 million policy and an excess $10 million policy. In July 2011, Ashland became involved in a U.S. Department of Justice investigation involving the company’s billing practices. The company ultimately paid $40.9 million to resolve the claim. On December 30, 2011, the final day on which notice of claim was permitted under the primary policy, Ashland provided notice of claim regarding the investigation to the primary carrier. However, Ashland did not provide the excess carrier with notice until June 29, 2012.
The primary carrier ultimately paid its $15 million policy limit, but the excess carrier denied coverage for the claim because of the late notice. Ashland filed a lawsuit against the excess carrier. The district court granted the excess carrier’s motion for summary judgment. Ashland appealed.
The February 29, 2016 Opinion
On appeal, Ashland conceded that notice to the excess insurer was late, but argued coverage was not precluded because the excess insurer had not shown that it was prejudiced by the late notice. Ashland relied on a Kentucky Supreme Court decision in which the court had held — with respect to an occurrence-based insurance policy– that an insurer must show prejudice in order to deny coverage based on late notice of claim.
On February 29, 2016 unpublished per curiam decision, the Sixth Circuit affirmed the district court’s ruling. The appellate court noted that the Kentucky Supreme Court had never addressed the question of whether or not the “notice-prejudice” rule applied to a claims-made insurance policy, like Ashland’s excess policy. However, the appellate court concluded that the Kentucky Supreme Court would not extend the notice-prejudice rule to a claims-made policy that contains unambiguous notice requirements as a condition precedent to coverage.
The question of whether or not the notice-prejudice rule applies to claim made policies is a recurring one; as I discussed in a recent post, I think there is a good argument that the rule should apply to claims-made policies, at least where the insurer was on the risk both when the claim was made and when the notice was provided – circumstances that apparently were not involved here.
But regardless of the merits of the question of whether or not the notice-prejudice rule should or should not apply to claims-made policies, there is a very important practical lesson here – that is, when providing notice of claim, it is important to notify all of the carriers, including the excess carriers, not just the primary carrier. To anyone who might say to this point, well, of course you should notify all the carriers, all I will say is that it is good to have these kinds of reminders. Even if you think your team would never forget to notify all of the carriers, it is worth having a reminder like this.
We all spend a lot of time working over the nuances of policy terms and conditions, but sometimes the question of whether or not an insurance policy will provide coverage comes down to some very basic things. The nuances can be very important, but taking care of the basics is important – in fact, in some cases, taking care of the basics may be the most important factor in deciding coverage.
This case is a reminder that there are some basic rules – like, say, always putting the shower curtain inside the tub – that you don’t want to have to learn the hard way that you should always follow. So let this case be a lesson to you. And me.
Upcoming Advisen Executive Risks Conference in Chicago: On Tuesday, May 10, 2016, I will be chairing the 2016 installment of the Advisen Executive Risk Insights Conference in Chicago. This half-day event, which will be held at the Hotel Allegro from Noon to 6 pm, will focus on D&O, employment practices and professional liability topics. Information about the program, including the agenda and registration instructions, can be found here. I am hoping that many readers will attend this event and I look forward to seeing everyone there.