In an interesting June 23, 2017 opinion in a case raising a host of claims made date, notice of potential claims, and notice of claims issues, Western District of Tennessee Judge Sheryl Lipman, applying Tennessee law, held that a purported notice to insurers of a potential claim was insufficient to provide notice of an actual claim, therefore concluding that the defendant insurers did not have to reimburse the policyholder for its $212.5 million FHA loan violation settlement with the DOJ. The opinion provides interesting insights into the meaning of the policy term “Claim,” as well as into what is required in order to provide sufficient notice of claim.

A copy of the June 23 opinion can be found here.  The Wiley Rein law firm’s June 26, 2017 post on its Executive Summary blog about the ruling can be found here.

Background Regarding FHA Loan Investigation and Settlement

On April 27, 2012, the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Justice (DOJ) began investigating First Tennessee’s loan–origination services for Fair Housing Act (FHA) loans. The investigation began with an April 2012 HUD document subpoena. In June 2012, the DOJ issued a Civil Investigative Demand requesting interrogatory responses. Subsequent document requests and depositions followed

In May 2013, DOJ and HUD representatives met with First Tennessee and its counsel regarding the FHA investigation.  Among other things, the government’s presentation included a summary of preliminary findings that First Tennessee was in violation of the FCA and outlined theoretical damages in excess of $1.19 billion. The investigation continued thereafter. In February 2014, the DOJ and First Tenneseee entered a tolling agreement in which the DOJ agreed not to file a lawsuit against First Tennessee on or before March 2014. The tolling agreement ultimately was extended several times.

On April 29, 2014, a DOJ representative communicated an oral offer to settle the ongoing investigation for payment of damages of $610 million. The offer was confirmed in writing by email. The email included a list of mortgages the government contended were deficient and that had been used as the basis to calculate the settlement offer.

In December 2014, First Tennessee again met with representatives of DOJ and HUD, in which the government provided a detailed presentation about its investigation of mortgage deficiencies.

In early 2015, First Tennessee made a series of settlement proposals. In June 2015, the parties reached a written settlement agreement in the amount of $212.5 million.

Background Regarding Insurance Issues

During the policy period August 1, 2013 through July 31, 2014, First Tennessee maintained a program of E&O insurance consisting of a primary policy and seven excess policies.

On May 27, 2014 – that is,  about a month after the April 29, 2014 $610 million settlement offer — First Tennessee provided the insurers with what it described as a “notice of circumstances that may give rise to a claim.” Among other things, the notice stated that since 2012, First Tennessee had been “cooperating … in a civil investigation regarding compliance with [FHA] requirements.” The notice stated that “discussions between the parties are continuing” and that “the investigation could lead to a demand or claim under the Federal False Claims Act.” The notice stated further First Tennessee “is not able to predict the eventual outcome of this matter,” adding that the government had “established no liability for this matter,” and that First Tennessee “is not able to estimate a range of reasonably possible loss.” The notice did not mention the $610 million settlement offer.

The primary policy defines the term Claim to mean: “(1) any written demand for monetary, non-monetary or injunctive relief; (2) any civil proceeding commenced by service of a complaint or similar pleading; (3) any arbitration, mediation or other similar dispute resolution proceeding; (4) any criminal proceeding commenced by return of an indictment; or (5)any administrative or regulatory proceeding commenced by the filings of a notice of charges, written request to interview, formal investigative order or similar document.”

With respect to notice issues, the Policy specifies that “the Insureds must give the Insurer written notice of any Claim as soon as practicable after the [Insured] becomes aware of such Claim, but in no event later than 90 days after the end of the Policy Period…”

Additionally, the Policy permits a “notice of circumstances” to be given to tie a future claim to the Policy, if during the policy period “the Insureds first become aware of any circumstances which may reasonably be expected to give rise to a Claim against the Insureds and if, before the end of the Policy Period … the Insureds give written notice to the Insurer of the circumstances and the reasons for anticipating such a Claim, with full particular…”

The primary dispute between First Tennessee and the insurers is whether the FHA Claim was first made during the Policy Period, and, if so, whether the Insurers received timely and proper notice. The insurers argued that the FHA Claim did not fall within the policy period and even if it did, it was not properly noticed. First Tennessee for its part argued that the Claim was not made until the December 2014 presentation and that the Claim was properly tied to the Policy Period by the May 2014 NOC.

The June 23, 2017 Order

In a detailed June 23, 2017 order, Western District of Tennessee Judge Sheryl Lipman, applying Tennessee law, granted in relevant part the insurers’ motion for summary judgment and denied in relevant part First Tennessee’s motion for summary judgment. In making these rulings, Judge Lipman concluded that the April 2014 settlement offer was a Claim about which First Tennessee failed to give sufficient notice under the Policy, and therefore that the defendants properly denied coverage.

In reaching this conclusion, Judge Lipman first concluded that the various events prior to the April 2014 settlement offer did not rise to the level of Claim.

First, she concluded that the subpoenas and CID that were served in June 2012 and March 2013 did not constitute Claims because they did not include specific allegations against First Tennessee under the FCA, and therefore did not constitute a Claim under the Policy because the relevant documents did not contain allegations of a “Wrongful Act.”

Second, she concluded that the May 2013 presentation, in which the government stated the elements of an FCA claim, discussed the strength of the evidence, and detailed anticipated damages, did “not quite” constitute a demand for monetary sufficiently to be considered a Claim. However, the May 2013 presentation did “at a minimum, constitute the first ‘circumstance which may reasonably be expected to give rise to a Claim,’ sufficient to trigger a NOC by Plaintiffs in that policy period, should it have chosen to do so.”

Third, the April 2014 $610 million settlement offer, which “must be viewed in light of all that came before it,” among other things, explained the calculation of damages and included a threat to file suit if plaintiffs did not make a “meaningful response to the settlement offer.” Judge Lipman said that “the only reasonable interpretation of the April 2014 email and settlement offer is that it was a ‘demand for monetary relief’ under the Policy, and, thus is a Claim.

Having determined that the April 2014 settlement offer constituted a Claim under the Policy, Judge Lipman than turned to the question of the sufficiency of notice.

After first noting that the May 2014 NOC did not refer to $610 million settlement offer that First Tennessee had received just a month earlier, she stated that “the general, boiler-plate language contained in the NOC was not sufficient notice.” She added that there was very little information in the May 2014 NOC that was not available to Plaintiffs prior to the relevant policy period.” She concluded that to permit First Tennessee to rely on the May 2014 NOC as notice of the April 2014 Claim “defeats that policy behind a claims-made policy, wherein the purpose of the notice requirement is to inform the insurer of its exposure to coverage.”

Finally, Judge Lipman rejected First Tennessee’s argument that the insurers had waived any objection to the NOC because they had not raised any timely challenged to it. After noting that under Tennessee law, a waiver is an voluntary relinquishment of a known right, she observed that the insurers “had no known right, as there was no indication of impeding litigation.” She added that the NOC was deficient not only because of its broad language, “but because the Insurers should have received a notice of a Claim, not a notice of circumstances.” Having no knowledge of the Claim or the $610 million settlement offer, the insurers “could not have waived their right to object.”

Discussion

If nothing else, these circumstances underscore the basic principle that no good comes of delaying notice of claim. It is not unfair to suggest that, at a minimum, First Tennessee was less than diligent in fulfilling its notice obligations under the Policy. Indeed, simply because of the amount of time that had passed and the significance of the events that had taken place before it provided notice, First Tennessee was always going to have an uphill battle trying to argue that it had fulfilled the policy’s notice requirement.

This case also provides some hard lessons about the importance of providing a sufficiently detailed notice of claim. In that regard, First Tennessee’s omission from the May 2014 NOC of any information about the $610 million settlement offer that it had received only a month prior can only be described as inexplicable. To be sure, there may well have been reasons that seemed good and sufficient at the time to First Tennessee that it believed militated in favor of providing only limited information to the insurers, but by omitting to provide the critical details, First Tennessee was unquestionably running a risk, a risk that was fully realized in this coverage decision.

There is a critical aspect of Judge Lipman’s decision that I think is important to keep in mind in terms of assessing the significance of this ruling. That is, it is important to underscore the fact that she was not saying the May 2014 letter was deficient as a “notice of circumstances that could give rise to a claim”; rather, she concluded it was deficient as a “notice of Claim.” I think this is important to underscore, simply to forestall any later attempts to rely on this decision to suggest that it provides useful or important guidance about sufficiency of a notice of circumstances. Judge Lipman’s ruling relates only to the sufficiency of a notice of claim, not to the sufficiency of a notice of circumstances that could give rise to a claim. That said, it should be duly noted that the provisions on most policies (including the policy at issue here) have very specific requirements in order to provide notice of circumstances that may give rise to a claim.

Judge Lipman’s analysis of whether the various events and developments that took place prior to April 2014 constituted claims is also interesting. For example, her analysis of whether or not the subpoenas or the CID represented Claims involves questions of a kind that frequently recur. While Judge Lipman ultimately concluded that the events prior to April 2014 did not constitute Claims within the meaning of the policy afford interesting insights into the way the Policy definitions operate under a variety of circumstances, the sequence, magnitude, and seriousness of these events highlight the absence of any communication to the insurers about these events. As I noted above, it was always going to be difficult for First Tennessee to argue that it was diligent in fulfilling its notice obligations under these circumstances.

Many of the kinds of issues this situation presented are now addressed specifically in policy wordings that are now relatively common. For example, current policy definitions of the term “Claim” frequently will include terms designed to address the question of whether or not a subpoena is a claim. Similarly, many policy definitions of the term claim will also specifically provide that a request to toll a statute of limitations represents a claim.

These expanded policy definitions are generally regarded as favorable to policyholders, and indeed in many circumstances these expanded definitions will be favorable to policyholders. However, the circumstances of this case highlight the dangers that could arise with these expanded definitions of the term “Claim.” The fact is that if the policy at issue here had included these expanded terms, the policyholder’s notice obligations would have been triggered even earlier in this sequence of events, perhaps before the inception of the relevant policy period.

In other words, while the relatively recent expansions of the definition of the term claim may indeed be favorable to the policyholder by creating an increased set of circumstances in which policy coverage can be triggered, the expanded definitions also carries potential pitfalls, in that the trigger of coverage also triggers the obligation to provide notice. The crux of this notice danger is that those who do not live with these issues all the time may not recognize that a Claim has been made even if no lawsuit has been filed.

Whatever else might be said about this case and about the risks involved with expanded definitions of the term Claim, these situation underscore the importance of communicating with a trusted and knowledgeable insurance advisor when problems arise. If policyholders wait until a lawsuit has been filed to seek insurance-related guidance, the request may come too late to do any good.