Let’s say your client has been served with a new D&O lawsuit. Based on what you know about the events that led up to the lawsuit, you are genuinely unsure whether the claim was first made earlier, or not until the lawsuit was filed. Just to complicate things further, during the last renewal cycle, the client moved its D&O coverage from one carrier to another carrier, and some of the events in the lawsuit lead-up occurred during the prior policy period. Just notice both carriers, right? That would seem to be the prudent thing to do, especially given the uncertainty about the claims made date, right?
It could be that by noticing both carriers, you could preclude coverage under the later policy, at least if the later policy has a prior notice exclusion worded in the same way as was involved in a recent coverage dispute. In that case, the Seventh Circuit, applying Indiana law, ruled that by operation of the prior notice exclusion the notice to the previous carrier precluded coverage under the later of the two policies. The Seventh Circuit’s July 2, 2019 ruling in the case can be found here. The Wiley Rein law firm’s July 17, 2019 post on its Executive Summary Blog can be found here.
For the policy period October 1, 2009 to October 1, 2010, Emmis Communications had its D&O insurance with one carrier (the 2009-2010 insurer). During the policy period October 1, 2011 to October 1, 2012, Emmis had its D&O insurance with another carrier (the 2011-2012 insurer). In 2012, in connection with an attempt to Emmis to go private, a number of lawsuits were filed against Emmis. Because there had been prior litigation against Emmis in 2010, Emmis noticed the new lawsuit to both the 2009-2010 insurer and to the 2011-2012 insurer. (The factual background regarding the earlier and the subsequent lawsuits is discussed at length in my blog post about the district court’s decision in this case, here).
The 2011-2012 insurer denied coverage for the new lawsuit, and Emmis filed a lawsuit against the insurer, alleging breach of contract and bad faith. The parties filed cross-motions for summary judgment. As discussed here, on March 21, 2018, Southern District of Indiana Judge William T. Lawrence, applying Indiana law, granted Emmis’s motion for summary judgment and denied the 2011-2012 insurer’s motion for summary judgment. The insurer appealed.
The 2011-2012 insurer’s policy contained a special events exclusion. In relevant part, the exclusion precluded coverage for “Event(s),” which included “[a]ll notices of claim or circumstances as reported under [the 2009-2010 policy].” The full text of the exclusion is set out in my blog post to which I linked above discussing the district court’s opinion.
The Seventh Circuit’s July 2, 2019 Opinion
In a terse, three-page July 2, 2019 opinion written by Judge Amy Coney Barrett, a unanimous three-judge panel of the Seventh Circuit reversed the district court’s holding and remanded the case to the district court.
The appellate court’s ruling depends on its interpretation of the 2011-2012 policy’s prior notice exclusion, an exclusion that the appellate court variously described as “complex” and “Byzantine.” The appellate court noted that the parties disagreed about the meaning of the term “as reported” in the prior notice exclusion. The 2011-2012 insurer argued that the exclusion precluded coverage for all notices provided to the 2009-2010 insurer at any time. Emmis contended that the exclusion applied only to notices that had been reported at the time the policy went into effect.
The district court had ruled that while both interpretations were reasonable, Emmis’s was the better, concluding that “as reported” must “refer to events that had already occurred at the time of drafting.” The district court was bolstered in its conclusion based on the rule of Indiana law favoring coverage when multiple reasonable reading of the insurance policy might apply.
The appellate court disagreed with the district court’s ruling, saying that the phrase “as reported” has “no discernable temporal limitations.” Once the 2009-2010 insurer had been provided with notice, “then that claim is ‘reported’ – and so it is excluded.” The timing of the report is “irrelevant.” The appellate court noted that Emmis had acknowledged in its legal briefs that it had reported the claim to the 2009-2010 insurer. That, the appellate court said, “resolves our inquiry.”
It is important to note, in ways that are not fully apparent from the appellate court’s opinion, that this dispute between Emmis and its insurer is in fact quite complex. As I noted in my discussion of the district court’s opinion in this case, the outcome of this insurance dispute is very fact-specific and relates primarily to the interpretation of a long, complicated (indeed, even “Byzantine”) exclusion that was customized to address very particular circumstances in which Emmis had been involved prior to the inception of the 2011-2012 policy. Because of these arguably unique circumstances, care should be taken in generalizing this case to other circumstances.
All of that said, I do have some concerns about the appellate court’s conclusion. It is not just that the appellate court completely blew off the consideration under Indiana law, noted by the district court, that where multiple reasonable readings of an insurance policy might apply, the courts should choose an interpretation that favors finding coverage. It is also that the appellate court was construing an exclusion that even the appellate court itself had to conceded was “complex” and “Byzantine.” Under Indiana law as well as under the law of most other states, exclusions are construed against the insurer. But instead of following these time-honored traditions about construing exclusions, the appellate court preferred an interpretation that not only represents a trap for the unwary insured but also effects a complete forfeiture of coverage and a windfall escape from coverage for the insurer.
As I noted at the outset, a cautious policyholder, unsure of during which of two policy periods a claim was first made, might well notice both carriers out of an abundance of caution. If the second of the two insurers has a prior notice exclusion worded like the one in the 2011-2012 policy here, the simple prudential act of noticing both carriers out of an abundance of caution could result in the complete loss of coverage under the second of the two policies.
To be sure, the outcome of this insurance dispute arguably is a reflection of the specific wording of the exclusion at issue. As the appellate court noted, Emmis had argued in favor of an interpretation of the prior notice exclusion contending that the exclusion applied only to claims that had been reported at the time the later policy went into effect. The appellate court rejected this argument based on its reading of the exclusion and the fact that the exclusion had “no discernable temporal limitations.” In the absence of any temporal limitation, then a notice at any time, even during a subsequent policy period, is sufficient to trigger the exclusion and preclude coverage.
The exclusionary language also lacked a provision that is fairly standard these days in prior notice provisions that the notice must have been given to a prior carrier and that notice has to have been “accepted.” If the notice to the prior carrier was not accepted, then the exclusion does not apply. This provison avoids the possibility that neither policy covers the claim simply because notice was given to a prior carrier.
As a general matter, I am against any provision in any policy that could operate as a trap for an unwary insured, and I am also against procedural requirements that can effect complete coverage forfeitures. It can’t be the case that simply providing notice to a prior carrier as a matter of caution should be sufficient to completely spring a subsequent insurer from its coverage obligations. This issue strikes me as the kind of thing that insurers as well as policyholders ought to strive to avoid.