Regular readers know that among the recurring themes on this site are concerns about problems with the application of notice rules to preclude insurance for claims that would otherwise be covered under the policy. These problems are, in my view, particularly abrupt where a claims is made during one policy period and the notice is provided during the policy period of a subsequent renewal policy issued by the same insurer. I have argued that continuity of coverage between the two policies and with the same insurer ought to be taken into consideration and that coverage should be denied only if the insurer can show that the late notice of claim during the renewal period prejudiced the insurer’s interests. In a recent appeal, the Ninth Circuit rejected this continuity of coverage argument. The appellate court’s opinion, though brief, raises a number of interesting points, as discussed below.
EurAuPair International Inc. is one of several federally authorized au pair programs. In November 2014, all 14 of the federally authorized au pair programs, including EurAuPair, were named as defendants in a lawsuit filed in the United States District Court for the District of Colorado (the “underlying lawsuit”). The complaint in the underlying lawsuit asserted a number of different claims against the defendants, including in particular a claim specifically against EurAuPair for alleged violation of the Sherman Anti-Trust Act.
EurAuPair was served with the complaint in the underlying action in January 2015. According to the declaratory action complaint that EurAuPair subsequently filed against its D&O insurer, EurAuPair believed at the time it received service of the complaint that its defense expenses would be entirely within the applicable deductible. EurAuPair did not formally tender the claim to its D&O insurer until April 2016, after a motion to dismiss had been denied in the underlying lawsuit.
EurAuPair had a non-profit D&O insurance policy in place during the time period October 1, 2014 through October 1, 2015. EurAuPair subsequently renewed its D&O insurance policy for the policy period October 1, 2015 through October 1, 2016.
After EurAuPair formally tendered the claim to its D&O insurer, the D&O insurer denied coverage for the claim, based, among other reasons, on the grounds that EurAuPair’s provision of notice was untimely under the terms of the policy. EurAuPair filed a declaratory judgment action and action for bad faith against the insurer, in the Central District of California. The District Court granted the insurer’s motion to dismiss and EurAuPair appealed.
The D&O insurer’s policy requires EurAuPair to report claims to the insurer “as soon as practicable but in no event later than thirty (30) days after the end of the Policy Period.”
The December 13, 2019 Ninth Circuit Opinion
In a December 13, 2019 three-judge panel per curiam opinion designated as Not for Publication, the Ninth Circuit affirmed the district court.
On appeal, EuroAuPair had tried to argue that the notice-prejudice rule applied to its policy. However, the appellate court said that under California law the notice-prejudice rule does not apply to claims-made-and-reported policies. EuroAuPair’s policy, the appellate court said, is a claims-made-and reported policy, and therefore the insurer “need not demonstrate substantial prejudice to deny coverage.”
EuroAuPair had also tried to argue on equitable grounds that its late provision of notice should not preclude coverage, owing to its renewal of the coverage with the same insurer. The appellate court rejected this argument, saying that “equitable relief is only justified under unique circumstances, such as when the insured did not have the opportunity to purchase extended reporting period and the insured reports the claim immediately upon learning it exists.” Here, the appellate court said, EurAuPair knew of the claim within the policy period and had thirty days after the policy period expired to report it “yet waited sixteen months to do so. Accordingly, the court said, equitable relief is not appropriate.
This was always going to be a tough case for EurAuPair. The organization’s long delay in providing the insurer with formal notice was always going to be tough to explain. Late notice disputes are always going to be tough for policyholders that whose actions do not bespeak diligence.
Beyond that, there is the added problem that the court here did not need to reach, that this might be one of those cases where the insurer actually might be able to show prejudice as a result of the late notice. The fact that the motion to dismiss in the underlying case had already been denied before EurAuPair finally provided notice to the insurer undoubtedly would have been relied on by the insurer to try to argue that the late provision of notice had prejudiced its interests.
However, even if there are aspects of this situation that are not sympathetic to the policyholder, it still bothers me that the notice prejudice rule is not be available based on the categorical principle that it does not apply to claims made and reported policies. In my view, this elevates form over substance and it creates the possibility that a mere process error will result in a total forfeiture of coverage. As I have noted at length in prior posts, late notice happens — it happens for many reasons, it happens for no reason, simply because people are involved. In my view, late notice ought not eliminate coverage unless the policyholder’s late provision of notice prejudiced the insurer. If the law in certain jurisdictions prevents this, then the right solution is for the policy to address it. The inclusion of language along these lines would, in my view, correctly address this situation:
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.
There is another thing about the sequence of events here that rubs me the wrong way. The insurer collected and will keep two consecutive premiums in order to provide this organization with insurance – indeed, or so EurAuPair argued in its declaratory judgment complaint, to provide insurance for the very type of claim that EurAuPair faced in the underlying lawsuit.
This situation, which comes up all too frequently (in my view), has motivated me to argue in the past that “continuity of coverage” ought to be recognized as a remedy for the late provision of notice – not necessarily to excuse the late notice altogether, but at least to specify that the insurer that accepted consecutive premiums and received notice during a renewal policy period can only deny coverage based on late notice upon a showing that the late notice caused the insurer prejudice.
While I believe this continuity of coverage argument has equitable merit, it has actually not fared that well in the courts recently. As I noted in a blog post last month (here), an Ohio appellate court, applying Ohio law, recently rejected this argument.
Given the rejection by some courts of this argument, perhaps the answer is for the “continuity of coverage” issue to be addressed in the policy. As I noted in my recent blog post about the Ohio appellate decision, I have seen policies from other jurisdictions that have continuity of coverage provisions, along these lines:
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.
I can imagine that there are insurer-side advocates that will contend that this type of provision unfairly exposes insurers to stale claims or encourage lack of diligence on the policyholder’s part. To address that concern, it would be appropriate for the section to provide further that the provisions do not apply if the insurer can show that it was prejudiced by the policyholder’s failure to provide notice of Claim.
As I have also previously observed, this kind of provision will at least encourage a policyholder to renew with the same insurer.
All of that said, I do think there is an important lesson to be drawn from this specific situation, beyond how the recurring late notice issues might be addressed. That is, that policyholders need to be diligent in protecting their own interests. A corollary is that policyholders should not talk themselves out of providing notice.
At least according to EurAuPair’s declaratory judgment complaint, the reason it did not provide notice at the time it receives service of the underlying complaint is that it assumed that its defense expenses would be within the applicable deductible.
This kind of analysis of the notice issue is always a bad idea; this reasoning should never be the basis for deciding not to provide notice. Unfortunately for EuroAuPair, this case provides a clear example of what can go wrong for any organization failing to provide notice on the assumption that the case with be resolved within the deductible. The problem is, as EuroAuPair found out, that you may not be able later to secure coverage if it turns out the case cannot be resolved within the deductible. Better – always better – to provide notice of claim at the earliest opportunity.