nystateA recurring theme on this blog is the problem that the late provision of notice creates for policyholders. Insurers frequently will seek to deny coverage when the policyholder does not provide timely notice of claim. As anyone with day-to-day claims involvement knows, there are a lot of reasons why policyholders fail to provide timely notice of claim. Sometimes the delayed notice is the result of a conscious decision, as, for example, when the policyholder decides that the claim isn’t all that serious. Sometimes, the failure to provide timely notice is the result of an oversight, as, for example, when the policyholder fails to recognize that the matter might be covered by insurance. That this type of oversight might happen is hardly surprising, since even very sophisticated business managers may not be fully aware of what their insurance might cover. When this happens, you would hope that the company’s attorneys would be looking out for them and would ask about the company’s insurance, as a way to help their clients to maximize available insurance protection.


As illustrated by a recent case from New York, it is an all-too-frequent occurrence that a company’s outside counsel fails to ask about the insurance or to inquire whether insurance might be available to protect the company. In discussing the New York case here, I have no interest in encouraging claims against companies’ counsel. Rather, my hope is that by highlighting these issues I will encourage both policyholders and their counsel to include the discussion of insurance into their standard routines at the outset of a claim, as a way to help ensure that policyholders avoid late notice problems and take full advantage of the insurance coverage for which they have paid. A copy of the May 11, 2016 New York intermediate appellate court case, Soni v. Pryor, can be found here. A June 14, 2016 memo from the Pullman & Comley law firm about the decision can be found here.



In the underlying lawsuit, CIT Healthcare sued Om Soni and others. CIT alleged that Soni and several other individuals, as directors and officers of several corporations, had aided and abetted the corporations in committing fraud and conversion. Soni and the other individuals hired attorneys from the Pryor & Mandelup law firm to represent them in the CIT action. After Pryor & Mandelup withdrew from representing Soni and the others, the individuals commenced a legal malpractice action against the law firm, alleging that the firm’s lawyers had failed to advise the individuals that they had insurance coverage available to them under a D&O insurance policy issued to one of the corporate entities the individuals controlled.


The law firm moved for summary judgment in the malpractice lawsuit, arguing that the firm’s alleged failure to advise was not the proximate cause of the individuals’ alleged injuries because the D&O insurance policy’s fraudulent misconduct exclusion would have precluded coverage in any event. The trial court judge denied the law firm’s motion, ruling that the firm had failed to establish that the plaintiffs could not prove the element of proximate causation, owing to the fact that the law firm could not show that the D&O insurance policy’s fraud exclusion actually would have been triggered. The law firm appealed.


The D&O insurance policy’s fraud exclusion provides that “The Insurer shall not be liable to make any payment for loss in connection with any Claim made against any Insured … (a) arising out of, based upon or attributable to the committing of any criminal, fraudulent or dishonest act if any final adjudication establishes that such criminal, fraudulent or dishonest act occurred.”


The Appellate Court’s Decision

In a May 11, 2016 opinion, a unanimous panel of the appellate division of the Supreme Court of New York, Second Department, affirmed the trial court’s ruling. In reaching this decision, the appellate court said “In light of the fact that the CIT action had not been finally adjudicated, and the plain language of the policy conditioning the applicability of the cited exclusion … the appellants failed to demonstrate that the relevant exclusion clearly applied to preclude coverage.”


The appellate court also said that the law firm also failed to demonstrate that the plaintiffs could not establish causation because the law firm declined to submit a claim to the insurer when, approximately one year and two months after service of the CIT action, they first discovered the potential availability of insurance coverage. The law firm, the appellate court said, “did not demonstrate that it will be impossible for plaintiffs to establish that notice given to [the D&O insurer] at that time would not have complied with the condition precedent to coverage that plaintiffs give notice of a claim ‘as soon as practicable.’”



For many readers, the interesting part about this appellate court decision is the way it demonstrates the fraud exclusion’s after adjudication requirement in action, by showing that the exclusion does not operate to preclude coverage unless there has been an adjudication that the precluded conduct has taken place. In the absence of an adjudication, the exclusion’s preclusive effect does not apply.


But for me, the interesting thing about this appellate decision is the back story about how the law firm and the individuals wound up on this dispute in the first place. In the appellate court, the law firm sought to argue it only found out about the existence of the insurance a year and two months into the underlying CIT lawsuit. I want to emphasize that I have no idea why the law firm did not find out about the potential availability of the insurance until its then-client was fourteen months into defending a lawsuit. I have no way of knowing whether or not the law firm inquired about the possible availability of coverage prior to that point. But I do know, regardless of what may have happened here,  all too often law firms fail to help their clients to determine at the outset whether or not there might be insurance available to help protect against claims that have arisen.


I know from experience that often it simply does not occur to company officials facing a legal dispute that their insurance might provide coverage for the matter. It may be that they just didn’t realize that their insurance covers the kind of dispute involved. Or it may be that they just really don’t understand all of the kinds of things that their insurance protects against. Regardless of the reason, this is the kind of problem that the company’s outside advisors should be helping them with.


I am not emphasizing this point because I want to encourage companies to try to hold their advisors liable when they fail to advise their clients about the possible availability of insurance. Rather, I am highlighting this case in the hope that by underscoring the problem here I might encourage both companies and their advisors to incorporate into their standard operating procedures at the outset of any claim or legal dispute a practical inquiry into the possible availability of insurance to help protect against the claim or dispute. Obviously, an important corollary to this standard practice is the added proviso that the routine should also include the provision of notice of claim under any and all potentially implicated insurance policies.


It is a hobby horse issue of mine that insurers all-too-frequently seek assert late notice as a way to try to evade coverage, as I have detailed in numerous prior posts (most recently here). While I think there are policy language alterations that can help minimize the risk of a late notice defense, the best way to avoid a late notice problem is to ensure that notice of all potentially covered claims is provided in a timely manner. Ultimately it is up to the policyholder to make sure that there are processes and controls in place to try to make sure that when a claim or dispute arises that the company’s insurers are notified. But the policyholders advisers should help them with this, and companies’ outside counsel should be there to help them preserve their ability to call upon their insurance when claims or dispute arise.


The company’s insurance advisors are there to help as well. I would like to think that most companies’ first action when claims arise is to contact their insurance advisors. However, I recognize that in many instances the first call may go to the outside counsel. That is why it is so important the lawyers help their clients address the insurance issues at the outset, because that is often who the client is relying on.


Insurance Coverage for Corporate Investigations?: Another frequently recurring D&O insurance issue is the question of coverage for investigations. In an interesting June 14, 2016 post on Woodruff-Sawyer’s D&O Notebook blog (here), Priya Cherian Huskins takes a detailed look at the various aspects of this question, including insurance solutions currently available in the marketplace. As Priya notes, the best time for a company to think about whether it has insurance available for an SEC investigation is before the claim has arisen. By addressing this question outside of the claim context and before the claim has arisen, a company can consider what steps it may want to take with respect to its insurance program in order to increase the potential coverage available in the event an investigation should arise.


D&O Developments Blog: And speaking of interesting blog posts, readers may want to take a look at the new blog from the Lane Powell law firm, D&O Developments (here). The posts for this blog will be written by members of the firm’s securities litigation practice group, and will address important securities law appellate decisions and other key securities litigation decisions. The blog is meant to be complementary to the more analytic content on the firm’s D&O Discourse blog, with which many of this blog’s readers may already be familiar. The new blog looks interesting and I encourage everyone to take a look at it and to follow it in the future.