Claims made insurance policies provide coverage for claims first made during the policy period. So if the claim is made during the policy period, there’s coverage, right? Not so fast; there’s a catch. Under most claims made policies, the claim also has to be reported during the policy period or within a short period after the policy period ends. In many jurisdictions, the insurer can deny coverage for the late notice even if the delay did not prejudice the insurer in any way. The policy’s notice clause operates as a “Mother May I” provision – even though you paid your premium, you don’t get coverage unless you say “Mother May I” and provide notice within the time limits. The problem is that policyholders muff the notice requirements all the time. We all know that. Late notice happens all the time. As a result, policyholders often get no coverage for the claims but the insurers keep the premium.
A recent case out of the Southern District of Ohio represents yet another instance where a policyholder’s tardy notice of claim stripped it of coverage. The outcome of the case may be unremarkable given the policy language and the applicable California law. The question for me is whether this is the right outcome — not necessarily in this lawsuit, but in general — given that we all know that late notice is such a frequent occurrence. As discussed below, I believe the insurance process should recognize this frequency and set things up so that the policyholder doesn’t forfeit coverage for a mere procedural error, at least in the absence of prejudice. Southern District of Judge Algenon Marbley’s June 12, 2018 opinion, discussed below, can be found here.
The insurance dispute in the Southern District of Ohio involves two sets of policyholders, the US HF companies (hereafter referred to collectively as US HF) and Global Wideband. Edward Bayuk is both the managing member of the US HF parent company and is CEO of Global Wideband. Both sets of policyholders are defendants in a state court action in Alabama. Both sets of policyholders were insured by the same management liability insurer.
The Alabama lawsuit was brought by minority shareholders of a unit of US HF, ShipCom. The minority shareholders had sold an 80% stake in ShipCom to US HF. In their lawsuit, the minority shareholders raised a number of allegations against US HF relating to the operations of ShipCom after the transaction. In an amended complaint, the minority shareholders added Global Wideband as an additional defendant, based on allegations relating to efforts of US HF to sell certain assets to Global Wideband.
US HF was insured under three consecutive management insurance liability insurance policies issued for three consecutive policy periods: July 31, 2013 to July 31, 2014; July 31, 2014 to July 31, 2015; and July 31, 2015 to July 31, 2016. The Alabama lawsuit was filed on May 29, 2015, during the policy period of the second of the three policy periods. Bayuk was among the defendants named in the lawsuit when it was filed. The US HF parties notified the insurer of the lawsuit on January 8, 2016 – that is, during the policy period of the third policy, but four months after the policy period of the second policy had expired.
Global Wideband was insured by a management liability insurance policy for the policy period September 24, 2015 to September 24, 2016. Global Wideband was not initially named as a defendant in the Alabama lawsuit. However, on November 25, 2015, the plaintiffs in the Alabama lawsuit filed a second amended complaint that named an officer of Global Wideband as a defendant. On April 4, 2016, the Alabama plaintiffs filed a third amended complaint naming Global Wideband itself as an additional defendant.
Bayuk executed the application for Global Wideband’s management liability insurance on August 31, 2015 (that is, three months after the Alabama lawsuit had been filed). The application’s Prior Activities Question asked if “the Applicant or any person proposed for this insurance in his or her capacity as an employee, officer, or director of the Applicant or another entity [has] been the subject of or involved in any … litigation” within the last three years. Though he had been named as a defendant in the Alabama lawsuit in his capacity as an officer of US HF three months before, Bayuk answered this question “No.”
Both the US HF parties and Global Wideband submitted the Alabama lawsuit as a claim under their respective management liability policies. The insurer denied coverage for the claim against the US HF parties on a number of grounds, including late notice. The insurer also denied coverage for Global Wideband on a number of grounds, including misrepresentations in the application for insurance. The US HS parties and Global Wideband filed a lawsuit against the insurer in the Southern District of Ohio. The parties filed cross-motions for summary judgment.
The June 12, 2018 Decision
In a June 12, 2018 decision and order Judge Marbley granted the insurers’ motion for summary judgment as to both sets of insureds, concluding the insurer had no duty to defend either set of insureds.
In what was a potentially an outcome determinative ruling, Judge Marbley first concluded that California law governed the insurance dispute, rather than Ohio law. He then concluded that the US HF parties had not provided timely notice of claim under their policy.
US HF’s policy requires that the insured be given written notice of any Claim as soon as practicable, but in no event later than (60) days after the end of the respective policy period. Judge Marbley noted that US HF had not provided notice during the policy period of the policy that was in force when the Alabama lawsuit was filed; rather, US HF provided notice eight months after the lawsuit was filed and four months after the expiration of the policy that was in force when the lawsuit was filed.
Judge Marbley also held that the insurer was not required under California law to show prejudice in order to rely on the late notice to deny coverage. California law, he said, provides that the notice prejudice rule does not apply to claims made policies.
US HF sought to rely on case precedent from Ohio in order to argue that because the policy was renewed, the general principle that the notice prejudice rule does not apply to claims made policies is inapplicable. Judge Marbley rejected this argument, holding that California and many other courts strictly enforce the reporting requirements, even when a policy is renewed. California Courts “consistently recognize that absent an agreement to the contrary, the renewal of a policy does not extend a policy’s reporting period.” Judge Marbley also distinguished the Ohio precedent on which US HF sought to rely based on differences in applicable policy language.
Finally, Judge Marbley concluded that coverage was precluded under Global Wideband’s management liability policy because of misrepresentation in the Prior Activities question in the policy application. Bayuk, Global Wideband’s CEO, and who had been named as a defendant in the Alabama three months earlier in capacity as an officer of US HF, did not disclose the lawsuit in response to the application question.
Judge Marbley rejected Global Wideband’s contention that the application question did not call for the applicant to disclose the US HF lawsuit. He also rejected the argument that the information about the Bayuk’s involvement in the other lawsuit is irrelevant, since the involvement in litigation of persons who would be insured under the proposed policy “has a history of being sued for business-related actions at previous companies” would be relevant information for the insurer. Judge Algernon also rejected the argument that the alleged misrepresentation was immaterial, noting that the policy’s language deems any misrepresentation to be material.
At one level, the outcome of the US HF’s late notice dispute is unremarkable. The policy requires notice to be provided no later than 60 days after policy expiration. US HF did not provide notice of the Alabama lawsuit within 60 days of the expiration of the policy that was in force at the time the claim was made.
As many readers know, I have difficulty with late notice defenses. There are two reasons why late notice cases bother me. One is that it just rubs me the wrong way that a mere procedural miscue can produce a forfeiture of coverage. All too often it feels to me in late notices cases as if a mere foot-fault is determining the entire match. The other problem for me is that late notice happens. Late notice happens for many reasons. Late notice happens because humans are involved. Anyone who has been involved in insurance claims at all knows that late notice happens all the time.
In my view the insurance equation ought to take into account that late notice occurs so regularly. I am not alone in this belief; many jurisdictions have adopted the notice prejudice rule, essentially recognizing that if the late notice didn’t cause any problems for the insurer, then the insurer shouldn’t be entitled to deny coverage.
Judge Marbley acknowledged the existence of the notice prejudice rule but concluded that under California law it did not apply because the policy involved is a claim made policy, even though the policy was renewed and the notice was provided during the policy period of the renewed policy. Again, this may be an unremarkable result given California law on this issue (although that does underscore how important the choice of law issue was).
Notwithstanding the apparent weight of California law supporting this conclusion, the outcome makes me uncomfortable. Judge Marbley said that “there is no dispute that the type of claims would be covered under the US HF Policies if they were made after the inception of the policies, timely reported, and not barred by any exclusion.” To put it another way, the underlying claim is exactly the kind of claim for which the policyholder bought the coverage – it is exactly the kind of claim for which any policyholder would even consider buying the insurance company’s insurance. It is, indeed, exactly the kind of claim for which US HF paid three successive insurance premiums.
Now, I know the insurer contends that there were other defenses to coverage beyond the late notice issue, including the potential applicability of certain policy exclusions. But for purposes of discussion, let’s assume that the carrier’s only defense to coverage was the notice issue; after all, it is the issue on which Judge Marbley concluded that there was no coverage for this claim.
So what we have is an insurer that accepted three successive premiums, agreeing to insure exactly the kind of claim that ultimately was filed, yet was relieved of the obligation to pay anything on the insurance for which it was paid three premiums, because the notice was tardy – without even having to show that the late notice prejudiced it in any way. (Indeed, as far as we know, the insurer was not prejudiced in any way.) The problem with this outcome is, to quote the words of Justice Cardozo, that it “visits venial faults with repressive retribution” – an outcome to me that is particularly objectionable where, as here, the insurer collected three successive premiums and was continuously on the coverage when the claim was made and notice was provided, yet paid nothing while keeping the premiums.
During a visit to Australia a short while ago, I learned that the notice prejudice rule has been adopted by law throughout the country. There, by statute, an insurer can only deny coverage for late notice if it is able to demonstrate prejudice. I favor the adoption of this kind of law here. However, given the 50 state involving in this country, it is unlikely to happen any time soon. For that reason, I favor the inclusion in the language of the policy a provision along these lines:
If the Insured fails to provide notice of such Claim to the Insurer as required under this Section, the Insurer shall not be entitled to deny coverage for the Claim based solely upon late notice unless the insurer can demonstrate that its interests were materially prejudiced by reason of such late notice.
This provision represents an honest recognition that late notice happens. If the insurer is prejudiced as a result then the insurer can rely on the late notice as a defense to coverage. But otherwise – not.
One final note about Judge Marbley’s conclusion about Global Wideband’s application misrepresentation – there isn’t going to be a lot of disagreement from anyone that Judge Marbley got that one right.