As anyone involved in the world of D&O insurance knows, a frequently recurring coverage issue is the question of whether or not the insured has provided timely notice of claim as required by the policy. These kinds of disputes takes a variety of forms, but one particular recurring variation involves the question whether or not the policyholder has satisfied the policy’s notice requirements when a claim is made against the policyholder during the policy period of one policy but the policyholder does not provide notice until the policy period of a subsequent renewal policy. That was the issue in a case recently decided by the Sixth Circuit Court of Appeals, in which the appellate court affirmed the district court’s holding that the policyholder’s provision of notice during the renewal policy of a claim made during a prior policy period did not satisfy the applicable notice requirements. Because this is a recurring claims issue, I have some thoughts and suggestions about this situation, below. The Sixth Circuit’s May 31, 2019 opinion in the case can be found here.
This case arises out of a dispute involving a group of interrelated entities involving the use of and access to certain maritime communications frequencies. The dispute resulted in a lawsuit filed in Alabama. The defendants in the Alabama lawsuit were served with the Alabama lawsuit in June 2015.
Three of the entity defendants in the Alabama lawsuit were insured under a D&O liability insurance policy. The policy was first purchased beginning on July 31, 2013, with a 2013-2014 policy period. The original policy was subsequently renewed for two consecutive annual policy period – that is from July 2014 to July 2015, and from July 2015 to July 2016. All three of the consecutive policies were issued by the same insurer. The insured entities first notified the insurer of the Alabama lawsuit on January 8, 2016. Thus, the claim was first made during the policy period of the 2014-2015 policy but notice was provided during the policy period of the 2015-2016 policy, which was a renewal of the prior two policies.
The insurer denied coverage for the claim on multiple grounds, including in particular on the ground that the insured had not provided timely notice of claim as required under the terms of the 2014-2015 policy. In denying coverage, the insurer cited the clause in 2014-2015 policy providing that it must be provided notice of claim during the policy period and “in no event later than sixty (60) days after the end of the Policy Period.”
The insured entities initiated a lawsuit against the insurer alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The parties filed cross-motions for summary judgment. In a June 12, 2018 opinion (discussed here), a judge in the Southern District of Ohio, applying California law, denied the insured entities’ motion for summary judgment and granted the insurers’ motion for summary judgment, finding that the insured entities had failed to provide the insurer with timely notice of claim as required under the policy. The district court judge expressly stated that California Courts “consistently recognize that absent an agreement to the contrary, the renewal of a policy does not extend a policy’s reporting period.” The insured entities appealed.
The May 31, 2019 Opinion
In a unanimous opinion designated Not Recommended for Publication written for a three-judge panel by Judge Richard Allen Griffin, the Sixth Circuit Court of Appeals affirmed the lower court’s holding, confirming that California law governed the parties’ dispute, and agreeing with the district court that due to the insured entities’ untimely provision of notice of the Alabama lawsuit, coverage for the claim was precluded under the policy.
In their appeal, the insured entities raised a number of arguments, the most notable of which here has to do with the fact that the insured entities had purchased three consecutive policies from the same insurer. The insured entities argued that the two renewals of the original policy in effect created “continuous coverage” across all three policies.
The appellate court rejected this argument, holding that “the renewal of a policy does not extend a policy’s reporting period,” and that under the plain language of the policies, each policy is “discrete and not continuous.”
Regular readers know that the forfeiture of coverage based on late notice is a hobby horse issue of mine. The reason this bothers me so much is that over the course of my over 37 year career in the world of D&O insurance, I know one thing for certain when it comes to notice – that is, late notice happens. It happens for a myriad of reasons. It happens because the person within the company that knows about the claim is not the same person that knows about the insurance. It happens because the person that knew about the claim didn’t understand that there might be insurance for the type of claim. It happens because the person that knew about the claim just didn’t think of giving notice right away.
It happens because humans are involved, and humans do things like giving late notice of claim. Regularly. All of the time. Over and over and over again.
The problem with the late notice issue is that it can effect a complete forfeiture of coverage, as in fact happened in this case. The notice requirement thus becomes at the same time a trap for the unwary and a coverage dodge for the insurer, even if the late provision of notice caused no harm to the insurer or had no practical consequence of any kind.
Late notice is almost certainly the most frequently recurring coverage issue. Everyone knows that policyholders frequently provide untimely notice of claim, resulting in the loss of coverage for claims that otherwise would be covered. I believe that as an industry we shouldn’t just accept this state of affairs, but rather we should recognize because humans are involved in this process, notice is going to be provided belatedly from time to time, and we should adjust the policy accordingly.
To be sure, some remedial policy measures have become fairly common in recent years. For example, many policies provide that the time within which the policyholder must provide notice of claim does not begin to run until certain specified officials at the policyholder company become aware of the claim. This provision protects against the problems that can arise when the person that knows about the claim is different than the person than knows about the insurance. So that addresses at least one of the frequently recurring problems.
There is a further deeper problem, and that is the fact that in many jurisdictions these days, the insurer can deny coverage based on late notice even if the late provision of notice had absolutely no practical consequence. This state of affairs in effect turns the notice requirement into a “mother may I” clause, where you don’t get coverage if you don’t say “mother may I.”
I think that the insurer should not be able to deny coverage for late notice of claim unless the insurer can show that the late provision of notice prejudiced the insurer in some way. In fact, many states have so-called notice prejudice laws, specifically providing that insurers deny coverage for a claim based on late notice only if the late notice prejudiced the insurer in some way. Unfortunately not all states have adopted the notice prejudice rule, and even under the law of some states that have the notice prejudice rule, the rule does not apply to claims made policies.
Given this patchwork applicability of the notice prejudice rule, I think the better approach – and an approach that an increasing number of insurers are adopting – is to modify the insurance contract itself by putting the notice prejudice rule right into the policy. An increasing number of policies these days incorporate notice prejudice provision, like the following:
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 such Claim based solely upon late notice unless the Insurer can demonstrate that its interests were materially prejudiced by reason of such late notice.
The inclusion of this kind of language would ensure that the late provision of notice will preclude coverage only if the late notice caused some material harm to the insurer’s interest.
This insurance dispute didn’t turn on the notice prejudice rule (the District Court expressly held that the notice prejudice rule does not apply under California law). But the policyholder did make an interesting argument that I think is worth considering further. The policyholder argued that because the two subsequent policies were simply renewals with the same insurer of the original policy, the policyholder had continuity of coverage across all three policy periods, allowing the policyholder to provide notice during the renewal policy period.
I am sure that many readers on the insurance company side of the aisle will agree with the appellate court’s rejection of this argument, based on the idea cited by the court that each policy is a discrete, separate policy of insurance. But I do think it is relevant in thinking about this issue that the insurer here accepted, and is going to keep, three consecutive policy premiums to provide insurance for the very type of claim that arose here, and even though the claim was made during the policy period of one of the policies, the insurer is relieved of the obligation to pay the claim.
In the law of some states where the notice prejudice rule is in effect but doesn’t apply to claims made policies, there is an exception allowing the rule to apply to claims made policies when (as was the case here)(a) the underlying claim was made during the policy period of one policy, (b) the insured was thereafter continuously insured under renewals of that policy, and (c) the insured provided notice during one of those renewal terms. If the law of a notice prejudice rule state were applicable here and if this exception were recognized, then the notice prejudice rule would have applied and the insurer could only have denied coverage if it were able to show that it was prejudiced by the late provision of notice.
The problem with this theory is that it depends on the applicable law. The argument has no weight outside of notice prejudice rule states. The solution then seems to me to address the continuity of coverage issue right in the policy.
In that regard, I recently had occasion to review a policy from another jurisdiction that had a so-called “continuity of coverage” provision, which provided as follows:
Notwithstanding the provisions of Section X, coverage is provided under this Policy for Claims that could have or should have been notified under any policy of which this policy is a renewal or replacement or which it may succeed in time, provided that:
(i) the Claim could and should have been notified after the Pending and Prior Date set for in the Policy Declarations;
(ii) the Insurer has continued to be the insurer under such previous policy without interruption; and
(iii) the coverage provided under this Section shall be in accordance with all of the terms and conditions (including the limits of liability and deductible amounts) of the policy under which the Claim could have or should have been notified. Any limit of liability available under this Section is part of, and not in addition to, the Limit of Liability set forth in the Policy Declarations, and the payment by the Insurer of any such limit of liability erodes the Limits of Liability set forth in the Policy Declarations.
Claims made coverage purists may argue against taking this kind of approach, and others may note that this provision does not merely make the late notice defense subject to a showing of prejudice, it side-steps the notice prejudice issue altogether. On the other hand, and before insurer-side advocates reject the idea out of hand, they should note that this provision does provide a strong incentive for a policyholder to renew coverage with the same insurer.
More to the point, this kind of provision, had it been in the insured entities’ policy, would have allowed the insured entities to preserve the coverage for which they had paid three successive premiums. It would also have eliminated the absurdity of a situation where an insurer is allowed to accept and keep three successive insurance premiums yet somehow deny coverage for a claim made during the policy period of one of the three policies and of the very type for which it provided the insurance.
I suspect this idea may be controversial. I certainly hope so. If nothing else, I would like for the D&O industry to confront the fact that policyholders are routinely deprived of coverage for the very kind of claims for which they purchased insurance, because of an issue that every single person in the D&O insurance industry knows happens over and over and over and over again.
As an industry, let’s confront the fact that the product will sell must be used by human beings. Let us an industry modify our product to allow for the fact that humans must use our product.