Under claims made insurance policies, policyholders must provide timely notice of claim to their insurers in order to trigger coverage. Late notice is among the most common reasons that insurers deny coverage for claims. In order to try to avoid a coverage denial for late notice, policyholders have tried to argue that late notice should not preclude coverage where the policyholder renewed the coverage and where successive policies with the same insurer are in place. In a recent decision, an Ohio appellate court, applying Ohio law, rejected a policyholder’s attempt to rely on this kind of continuity of coverage argument. The court’s decision raises some interesting issues, as discussed below.
ISCO Industries has a Canadian subsidiary, ISCO Canada. Both are referred to here as ISCO. On January 31, 2014, ISCO received a demand letter from outside counsel for a competitor. The letter asserted that former employees of the competitor that ISCO had hired had post-employment obligations to the competitor. On February 25, 2014, the competitor filed a lawsuit in Canada against ISCO and several of its employees.
ISCO had a D&O insurance policy in place with the same insurer for three successive policy periods: March 19, 2013 to March 19, 2014; March 19, 2014 to March 19, 2015; and March 19, 2015 to March 19, 2016.
ISCO notified the insurer of the Canadian lawsuit on August 20, 2015 – that is, about a year and a half after the lawsuit was filed. The lawsuit was filed during the policy period of the first of the three successive policies, while ISCO provided notice during the policy period of the third of the three successive policies.
ISCO’s D&O insurer denied coverage for the lawsuit. ISCO eventually settled the Canadian lawsuit and then sued its insurer for breach of its duties under the policy to defend and indemnify. The insurer moved to dismiss ISCO’s complaint, arguing that ISCO had failed to timely notify the insurer of the lawsuit as required under the policy. The trial court granted the insurer’s motion to dismiss and ISCO appealed.
The notice provision in ISCO’s policy required ISCO to give notice of a civil proceeding against it “as soon as practicable from the date the General Counsel, Risk Manager, or person of equivalent responsibility has knowledge of the Claim, and in no event later than ninety (90) days after the end of the Policy period.”
The November 27, 2019 Opinion
In a November 27, 2019 opinion written by Judge Robert C. Winkler for a unanimous three-judge panel , the Ohio Court of Appeals (First Appellate District), applying Ohio law, affirmed the trial court’s dismissal of ISCO’s complaint.
On appeal, ISCO had tried to rely on a line of Ohio court decisions, following a 1995 Ohio intermediate appellate court decision in the Helberg case, in which the courts had determined that where the notice provisions in claims made insurance policies were ambiguous, late notice would not operate to preclude coverage for a claim as long as the policy was renewed and notice of claim was provided within a reasonable time. In Helberg, the court has said that the notice provisions could create a “trap wherein claims spanning the renewal are denied.”
The Ohio appellate court concluded that the Helberg line of cases did not apply with respect to ISCO’s policy and claim. In this case, the court said, and by contrast the policy in Helberg, “the notice provision in the policy is unambiguous.” The provision’s 90-day notice requirement both “eliminates the ‘trap’ concern in Helberg” and provides a 90-day cushion after the end of the policy in which ISCO could provide notice.
ISCO’s argument “that Helberg applies such that its policy renewal creates an expectation of continuous and seamless coverage, so long as ISCO reported its claim in a reasonable time, is not supported by the plain language of the policy.”
ISCO also tried to argue that notwithstanding the allegedly late notice, the insurer must still provide coverage if it has not been prejudiced by the late notice. The appellate court rejected this argument as well, concluding that cases that has required a showing of prejudice for late notice to preclude coverage involved notice provisions that has been found to be ambiguous. The appellate court said this notice-prejudice rule was “inapplicable in cases where the policy provides that notice of a claim must be given to the insurer by a certain date.”
Because the notice provision here included a specific 90-day time requirement, the notice prejudice rule does not apply and therefore the insurer “need not demonstrate that it was prejudiced by ISCO’s untimely notice of claim in order for [the insurer] to deny coverage.”
At a certain level, the outcome of this case is unremarkable. Given the language of the policy and the circumstances (especially the year-and-a-half notice delay), it was always going to be hard for ISCO to prevail here.
But while some might say ISCO’s case here is not very sympathetic, there is still something about this situation that rubs me the wrong way.
I have no idea whether ISCO’s claim would have been covered if it had provided timely notice. But let’s assume for the sake of discussion that the claim would have been covered. What that would mean is that even though ISCO paid the premiums for three successive policies that covered the very kind of claim for which it purchased the coverage, the insurer gets off without paying anything — and keeps the premiums, as well.
These kinds of continuous coverage circumstances have encouraged me in the past to argue that “continuity of coverage” ought to be recognized as a remedy to late provision of notice. I have tried to suggest that if the policy has been renewed continuously with the same insurer, then the timeliness of the notice simply shouldn’t matter, particularly where the insurer was not otherwise prejudiced by the supposed notice delay.
The court here specifically rejected ISCO’s attempt to make the continuity of coverage argument, saying that the theory was inapplicable where the notice provisions were unambiguous and the applicable policy’s precise notice timing requirements eliminated the risk of a “trap” for the insurer for claims spanning the renewal.
I dislike mere procedural requirements that can completely eliminate coverage, and it just rubs me the wrong way that an insurer can collect and keep premiums for multiple successive policies yet avoid paying out for otherwise covered claims.
Perhaps the answer is the “continuity of coverage” issue ought to be addressed right in the policy itself.
I have seen policies from other jurisdictions that have continuity of coverage provisions, that provide as follows:
Notwithstanding the provisions of Section X, coverage is provided under this Policy for Claims that could have or should have been noticed 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 have and should have been notified after the Pending and Prior Date set forth 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 the terms and conditions (including the limits of liability and deductible amounts) of the policy under which the Claim could have been notified. Any limit of liability available under this Section is part of, and not in addition to, the Limit of Liability set for in the Policy Declarations, and the payment by the Insurer of any such limit erodes the limit of liability erodes the Limit of Liability set forth in the Policy Declarations.
For those who might contend that this kind of provision unfairly exposes insurers to stale claims or encourage lack of diligence on the policyholder’s part, perhaps an additional provision could be added providing that notwithstanding the foregoing, this continuity of coverage provision shall not apply if the insurer can show that it was prejudiced by the policyholder’s failure to provide notice of Claim.
I know insurer-side representatives will not like this provision. Even though it does provide substantial incentive for policyholders to renew their coverage with the same insurer. I raise this possibility here, as I have previously raised it, in the hope of provoking some discussion. My larger hope is that as an industry we can try to move away from mere procedural provisions that can produce a complete forfeiture of coverage, even in the absence of prejudice.
In any event, and regardless of whether or not there are ways the policy might be modified in order to try to preserve coverage for claims, there is one practical way for policyholders to maximize the likelihood that their claims are covered. When it comes to protecting policyholders’ interest, there is no substitute for diligence. I know from all too much experience over a very long career that late notice can happen for many reason, or even for no reason at all. However, policyholders that are aware of and attentive to their policy obligations are less likely to find themselves without insurance in the event of a claim.