by Christopher Graham and Joseph Kelly

Consumers Ins. Co. v. James River Ins. Co., et al, Case No. 12-03303-CV-S-JTM (W.D. Mo. Jan. 14, 2014)

This case involves an insured’s failure to timely report a claim under D&O (US Specialty) and E&O (Houston Casualty) policies. Both policies required notice “as soon as practicable” after Claim is made. The E&O policy also required notice no later than 60 days following the policy period. The insured was an insurer that should have known better. Prejudice from the delayed notice to the insurer was irrelevant.

The underlying case against the insured insurance company was a Missouri garnishment action, including a bad faith cross-claim. Dahmer sued the insurer’s insured, Hutchinson, for serious injuries allegedly caused when Hutchinson’s vehicle struck him. Dahmer’s wife also sued. They made a limits demand in July 2007 on the insurer. But it denied coverage. Then they obtained an uncontested $2.7 million judgment against Hutchinson.

Thereafter they filed a garnishment action against Hutchinson and the insurer. The trial court granted the insurer a summary judgment based on a “salvage operations” exclusion. But the appellate court in 2010 reversed. On remand, Hutchinson cross-claimed against his insurer for bad faith. In late November 2010, Hutchinson made a demand on his insurer for $3.5 million, the judgment against him plus interest.

As of the November 2010 demand, the insurer had in effect a claims-made insurance company E&O policy, effective February 16, 2010 to February 16, 2011. It limited coverage to claims made for “wrongful acts” first committed on or after February 16, 2010. And it provided:

As a condition precedent to any right to payment in respect to any Claim, the Insured must give the Underwriter written notice of such Claim, with full details, as soon as practicable after the Claim is first made but in no event later than sixty (60) days after the end of the Policy Period. A Claim is first made when an Insured first receives notice of the filing of a complaint, notice of charges, a formal investigative order or similar document or by the return of an indictment against an Insured or when an Insured first receives the written demand or notice that constitutes a Claim under [another definition].

Beginning February 16, 2005, the insurer also had five claims-made insurance company D&O policies, each for a one year term, with the last expiring February 16, 2010. Those policies provided: “The Insureds must, as a condition precedent to the obligations of the Insurer under this Policy, give written notice, including full details, to the Insurer of any Claim as soon as practicable after it is made.” Claim included “any oral or written demand, including demand for non-monetary relief” or “any civil proceeding commenced by service of a complaint or similar pleading.”

When the Dahmers filed their garnishment action, the insurer didn’t notify its D&O and E&O insurers. When thereafter Hutchinson made his November 2010 demand for $3.5 million, the insurer didn’t notify them either.

Seven months after the E&O policy expired, by November 29, 2011 letter, insurer by its broker first notified the E&O insurer’s claims administrator (HCC Global Financial Products) of the Dahmers’ garnishment action. The notice referenced only the E&O policy.

Fifteen months after Hutchinson’s $3.5 million demand on insurer, by February 22, 2012 letter, insurer’s counsel notified the D&O insurer through its claims administrator of the Dahmers’ garnishment action including Hutchinson’s bad faith cross-claim. This letter referenced only the D&O policy. The D&O and E&O insurers had the same claims administrator, HCC.

After the E&O and D&O insurers denied coverage, insurer sued them for a declaration that they must provide coverage. But this Court, applying Tennessee law, held the E&O and D&O insurers were entitled to a judgment as a matter of law. The Court strictly enforced the E&O policy’s requirement of notice no later than 60 days following policy expiration; notice seven months after expiration wasn’t what the policy required. It also found the insurer’s 15-month delay in notifying the D&O insurer after Hutchinson’s $3.5 million demand was not notice “as soon as practicable,” given the absence of “extenuating circumstances” providing excuse or explanation. Prejudice to the E&O and D&O insurers wasn’t discussed and didn’t factor in the decision. Nor did it matter that the D&O and E&O insurers had the same claims administrator, at least because the notices were specific in identifying which policy was the subject of the notice.

In explaining its decision about the D&O policies, the Court stated:

[I]t has long been the law in Tennessee that “notice provisions of an insurance policy are valid conditions precedent to coverage, and in the absence of notice as required, no coverage is afforded.”

Moral of story for insureds and brokers: Always, always, give notice promptly to insurers; consider the issue any time something like a claim comes to you. Otherwise you may have no coverage. This has been a recurring theme on this blog lately.

Tags: Tennessee, insurance, D&O, E&O, notice