Readers know that it doesn’t take much to get me up on my hobby horse about insurers trying to deny coverage based on the late provision of notice. In general, I am against a mere procedural fault causing a complete coverage forfeiture. Every now and then though there is a case where the policyholder’s lack of diligence makes the case against the insurer’s coverage defense very tough. A recent decision out of the District of Minnesota provides an example where the extent and nature of the policyholder’s delay in providing notice of claim made the argument in favor of coverage very difficult. But while the insurer’s denial of coverage based on policyholder’s late provision of notice arguably was justifiable in the case, the circumstances involved still present some important lessons both about notice of claim and about the policyholder’s obligations under the policy.
District of Minnesota Judge Susan Richard Nelson’s August 26, 2019 opinion in the case can be found here. A September 18, 2019 post on the Wiley Rein law firm’s Executive Summary Blog about the case can be found here.
Assessment Systems is a consulting services and testing software company. Assessment Systems entered into a contract to provide services to Crane, a company that certifies crane operators. During the course of the contract, Crane contended that the software Assessment Systems provided failed to function under the terms of the parties’ agreement, and refused payment.
In June 2017, Assessment Systems sued Crane alleging breach of contract and seeking damages for non-payment. On April 21, 2017, Crane answered and filed a counterclaim against Assessment Systems asserting breach of contract and breach of warranty. The initial discovery deadline was December 15, 2017, but it was extended to April 23, 2018.
Assessment Systems provided notice of the counterclaim to its Business Owners’ policy insurer on April 19, 2018 – as the Court later observed, the notice was provided “approximately one year after the Counterclaim was filed, and only four days prior to the close of discovery.” Prior to providing notice, Assessment Systems did not obtain any discovery supporting or refuting and of Crane’s asserted damages relating to Crane’s counterclaim and did not depose any witnesses, including Crane’s expert witness.
The reason Assessment Systems did not provide notice of the counterclaim earlier is that its Director of Human Services – the employee responsible for managing insurance coverage issues for the company – was terminated in December 2017 and had never informed Assessment Systems of the need to make a claim to the insurer. As the Court later noted, “No explanation is offered by Assessment Systems for why notice was not provided to Citizens during [the] eight months” prior to the HR director’s termination. After the HR director’s departure, another employee took responsibility for the insurance matters, and ultimately discovered the insurance policy from which Assessment Systems sought coverage, and then caused Assessment Systems to provide notice to the insurer.
On May 21, 2018, the insurer appointed counsel to represent Assessment Systems with respect to the counterclaim. Assessment Systems, with the assistance of counsel appointed by the insurer, move for partial summary judgment with respect to a contractual limitation on Crane’s claimed damages. The court granted the motion, but preserved for trial questions of damages stemming from amounts Crane had paid under the contract. Trial in the case is currently set for September 30, 2019.
The insurer filed a federal court action seeking a judicial declaration that it has no duty to defend or indemnify Assessment Systems in the underlying lawsuit. The insurer filed a motion for summary judgment.
The claims-made insurance policy that the insurer issued to Assessment Systems provided, among other things, that “If a ‘claim’ is made against ‘you,’ you must see to it that we receive written notice of the ‘claim’ as soon as practicable.”
The August 26, 2019 Opinion
In an August 26, 2019 opinion, District of Minnesota Judge Susan Richard Nelson, applying Minnesota law, granted the insurer’s summary judgment motion.
Judge Nelson first determined that although the policy did not specific say so, timely notice is required as a condition precedent to coverage under the insurer’s policy. The “plain and natural language” of the policy’s insuring agreement specifies that the policy’s coverage applies “only if” the policyholder provides notice of claim to the policy. Judge Nelson also noted as a general matter the claims-made policies require notice before insurance coverage attaches.
Judge Nelson then concluded that notice requirement of the policy is “material” to the insurance agreement and therefore cannot be excused. She said that “considering the integral nature of notice to the insurer in claims-made insurance policies, and because the Policy at issue here is a claims-made policy, the Court holds as matter of law that the notice requirement in the Policy is ‘material’ – indeed a ‘basic’ or foundational – term of the insurance agreement.” As a material condition precedent to coverage, the notice requirement “must be literally met or exactly fulfilled” or no liability can arise on the promise qualified by the condition.
Judge Nelson then concluded that “the undisputed facts demonstrate that notice was not given as soon as practicable.” The neglect of the company’s terminated HR director “is not a valid reason to delay notice,” particularly given the eight-month delay after the counterclaim was served and the HR director was terminated. The negligence of an employee, Judge Nelson said, “does not excuse a company’s failure to comply with a contract.” Holding otherwise, Judge Nelson said, “would permit employers to dodge insurance contract requirements where their employees are less than vigilant on insurance matters, which in turn may prejudice the insurer because the lapse of time can deprive the insurer of the opportunity for prompt investigation and impede defense against fraudulent claims.”
Finally, Judge Nelson noted that although a showing of prejudice is not required under Minnesota law for an insurer to assert late notice as a defense to coverage, “even if a showing of actual prejudice were required, there is not genuine dispute of material fact that [the insurer] suffered actual prejudice as a result of Assessment Systems’ untimely notice.” During the period of the delayed notice, Assessment Systems conducted no discovery of Crane’s counterclaims and took no depositions, including no deposition of Crane’s expert. The notice was provide to the insurer just four days before the discovery deadline, and while some of Crane’s damages claims were defeated by Assessment System’s partial summary judgment motion, Assessment Systems is unable to conduct any discovery of Crane’s remaining damages claims.
It is always going to be a tough fight for a policyholder if its best argument against its insurer’s late notice defense is that the notice was untimely due to the neglect of an incompetent employee who ultimately was fired. However, I will say that almost every late notice dispute involves some element of oversight or omission. The fact is that in my experience, late notice happens. It happens for lots of reasons or for no reason at all. The question that the late provision of notice always presents, regardless of its cause, is whether the fact that notice was not timely provided should operate as a complete forfeiture of coverage.
In this case, Judge Nelson in effect anticipated my usual fall back argument about late notice, which is that the insurer ought not to be able to rely on the late notice to defeat coverage unless the untimeliness of the notice prejudiced the insurer’s interests. Here, though the insurer was not required under Minnesota law to establish that it was prejudiced by the late notice, Judge Nelson said that even if prejudice were required, the record shows that the late provision of notice did prejudice the insurer. (Indeed, it could be said that not only was Assessment Systems not diligent in protecting its interests under the policy, but diligence as similarly lacking in the way the company defended itself against Crane’s counterclaim.)
The best that can be said about this case is that it demonstrates a point that I often make when discussing notice issues, which is the importance for policyholders to be diligent in protecting their interests under the insurance policies. While there are many arguments I am prepared to make to try to counteract insurer’s attempts to avoid coverage, the most effective way for policyholders to preserve coverage is to avoid giving the insurer grounds on which to rely in trying to deny coverage. Well-advised policyholders will take appropriate steps to protect their interests, including take all steps to fulfill the policyholder’s obligations under the policy. (In one of the units in my series on the Nuts and Bolts D&O insurance, I discuss the policyholder’s various policy obligations at greater length.)
There are some other lessons here. First, the function of administering a company’s insurance program is a very important responsibility. It should be undertaken by someone with a certain amount of sophistication and experience – and competence. With all due respect to persons who serve in the role of HR director, the HR department is not necessarily the first place that comes to mind when you are thinking about where within a company to place the insurance management function. The key is that the insurance administration function is an important one; it should be treated as an important function and the responsibility for the function should be assigned in recognition of the function’s importance.
Second, as I think this case shows, it may not always be obvious when a claim has arisen. The underlying dispute here began as an attempt by Assessment Systems to collect unpaid amounts due from Crane under the service contract. The lawsuit only became a matter of relevance to the insurance policy when Crane filed the counterclaim. As often happens when litigation unfolds, it may not have occurred to anyone at Assessment Systems that what had started out as essentially a collection lawsuit had become a matter for which its insurance policy might provide coverage.
The failure to recognize that a given matter is or has become something to which the insurance might be relevant happens fairly often. One of the reasons for this failure to recognize a claim is that the policy’s definition of Claim is so broad these days, encompassing a wide variety of legal matters. Another reason for the failure to recognize a claim is, as was the case here that various legal matters may not start out as claims but become claims later on.
This failure to recognize a claim problem is a tough one. More than once in my career I have been in routine renewal conversations with clients and in the course of discussion it will just come out that there is some pending matter that does or could be a claim under the policy. (Many practitioners will no doubt themselves be familiar with these “Oh, by the way…” kinds of conversations.) As advisors, the best we can try to do to help our clients avoid getting in this kind of situation is to remind them frequently of the breadth of the policy’s definition of the term claim and of the importance of providing the insurer with timely notice.
All of that said, and as I noted above, I am still prepared to argue as much as possible and in many situations that the late provision of notice should not effect a complete forfeiture of coverage. The fact is that when humans are involved, things like the late provision of notice are going to happen. The policy should be administered in a way that makes allowances for the fact that humans are involved.