Despite Policyholder’s Delayed Notice, Insurer Must Cover Subsequent Claims Related to Earlier Timely Claim

Despite Policyholder’s Delayed Notice, Insurer Must Cover Subsequent Claims Related to Earlier Timely Claim

 On July 16, 2014, the Eighth Circuit, applying New York law, concluded that because a financial services firm’s professional liability insurance policy was ambiguous on the question whether the policy’s timely notice requirements apply to later claims related to a timely original claim, the policy provides coverage for the later claims. The district court had held that Missouri law governed the notice issue and because the insurer had not been prejudiced by the late notice, the delayed notice did not preclude coverage. The appellate court found that New York law governed rather than Missouri law but nevertheless affirmed the district court’s holding because it found the notice requirements to be ambiguous. A copy of the Eighth Circuit’s opinion can be found here [an enhanced version of this opinion is available to lexis.com subscribers].

Background       

George K. Baum & Company is a nationwide financial services firm based in Missouri with offices around the country, including in New York. Among other things, Baum underwrote various municipal bonds, representing them to be tax exempt. In August 2003, Baum became aware of an IRS investigation into twenty-three of its municipal bond issues. Baum timely advised its professional liability insurer of the IRS investigation and of the possibility of claims by municipal clients and bondholders. Baum’s insurer agreed to treat the IRS investigation as a claim under the policy. Baum ultimately settled with the IRS without admitting liability.

In 2008, Baum was hit with a series of lawsuits relating to its municipal derivatives business (the “derivatives lawsuits”). In April 2010, almost two years after the derivatives lawsuits were filed, Baum provided its professional liability insurer with notice of the suits. The insurer denied coverage for the derivatives suits on the grounds that the suits were not claims made during the period when its policy was in force.

In January 2011, Baum filed an action in the Western District of Missouri against its insurer alleging breach of contract and seeking a judicial declaration that the derivatives lawsuits were covered under the professional liability policy. Three days before its answer to Baum’s complaint was due, the insurer admitted that its earlier coverage denial on the claims made issue was in error and agreed that it would treat the subsequent derivatives lawsuits and the earlier IRS investigation as a single claim first made when the IRS investigation was launched in 2003. However, the carrier nevertheless continued to deny coverage for the derivative lawsuits on the ground – not previously raised — that the derivatives lawsuits were not timely reported to the insurer as required by the policy. The insurer filed a declaratory judgment counterclaim and parties filed cross motions for summary judgment.

The district court held that under Missouri law untimely notice is no defense to coverage in absence of prejudice and because the insurer claimed no prejudice, the delayed notice of the derivatives lawsuits did not preclude coverage. The district court also ruled that the $3 million retention applicable to “activities as an underwriter or seller of municipal bonds” applied, rather than the $1 million retention Baum contended was applicable. Both parties appealed.

The July 16 Opinion 

In a July 16, 2014 opinion written by Judge William J. Riley for a unanimous three-judge panel, the Eighth Circuit affirmed the district court’s rulings, even though the appellate court held that New York law governed rather than Missouri law.

The insurer had argued that New York rather than Missouri law applied and that under the New York law applicable at the time, an insurer asserting a late notice defense was not required to show prejudice, by contrast to Missouri law where an insurer that was not prejudiced could not assert a late notice defense. Because the policy had been (at Baum’s request) delivered to Baum’s New York address and had been issued with the requisite New York amendatories, the appellate court agreed with the insurer that New York law governed the interpretation of the policy. However, because the appellate court also found the policy to be ambiguous on the applicability of the policy’s timely notice requirements to subsequent related claims, the court rejected the insurer’s arguments on the notice issue.

The appellate court found that because the subsequent lawsuit and the IRS investigation were deemed a single claim under the policy, “all of the later filed derivatives litigation lawsuits constitute ‘a single CLAIM for all purposes,’ including notice.” The court added “we do not find any unambiguous basis in the policy” for the insurer’s proposed limitation of the phrase “all purposes” so as to carve out notice issues. Accordingly, the Court accepted Baum’s interpretation that the policy’s notice provisions do not apply to subsequent actions, such as the derivatives lawsuits, arising from the same underlying conduct as the earlier timely notified claim.  

The Court also rejected the insurer’s argument that if Baum’s theory were accepted then the policyholder would be free to delay notice of subsequent related claims for indefinite time periods. The appellate court said that “these are the complaints of a poor draftsman, and we are as unsympathetic as we expect the New York Court of Appeals would be,” adding that “it is not our role to rescue an insurer from its own drafting decisions.”

The Court also declined to consider whether or not Baum breached New York’s implied-in-law requirement of notice within a reasonable time because the insurer “failed to raise any implied notice argument in the district court or on appeal.” But even setting aside the insurer’s “waiver” of this issue, the Court said it would be “reluctant to predict a breach” of the implied requirement “in the absence of prejudice,” as, the Court noted, New York courts have been “reticent” to apply the state’s “no prejudice rule” where the insurer received timely notice of claim but arguably late notice of a lawsuit.

Finally, the Court affirmed the district court’s ruling that the policy’s $3 million retention for claims related to underwriting activities applied, rather than the $1 million retention that would otherwise have applied.

Discussion  

In a June 2, 2014 post (here), J noted that a New York appellate court, applying New York law, held that an insurer’s policy was ambiguous on the question of the applicability of notice timeliness requirements to subsequent related claims where notice of the first claim was timely. I also noted that the question that case presented was an “interesting issue” that “undoubtedly will come up again in the future.”

As this latest case show, the notice timeliness of subsequent related claims issue is a recurring one. The Eighth Circuit seems to have been unaware of the New York intermediate appellate court decision I referenced in the earlier post (it was a terse, three-page opinion), but the holdings of both the courts were essentially the same – that is, that the applicability of the notice timeliness requirements to subsequent claims related to an earlier timely claim is ambiguous.

Given that earlier New York appellate decision, the Eighth Circuit’s application of New York law here seems to be on solid ground. Just the same, it seems to me the insurer’s case here was always going to be tough. First of all, as I noted in my prior post linked in the preceding paragraph, notice defenses generally are disfavored by the courts (although not invariably, as noted here).

The other problem about the insurer’s position is that the insurer originally denied coverage on the basis that the subsequent derivatives lawsuits were not claims made during the applicable policy period. The insurer later walked back its coverage denial on this ground – but only afterthe insured had already been forced to initiate coverage litigation to compel the insurer to honor its contractual obligations. Rather than simply acknowledging coverage at that point, the carrier substituted a new basis for denying that it had not previously asserted, that is, the alleged untimeliness of notice of the subsequent derivatives claims. This belated substitution of coverage defenses put the insurer in an unfavorable light, which at least to my eyes seems to have affected the Eight Circuit’s perception of carrier’s position. (I will say that this sequence affirms the value for carriers of laying out their entire coverage position at the outset, as a later piecemeal substitution of alternative coverage defenses arguably reflects poorly on the carrier.)

There arguably is another issue that I think may supersede all of the various notice-related issues discussed in this opinion. That is, the way I read the court’s description of Baum’s initial notice, Baum not only notified the insurer of the IRS investigation but advised the insurer that the circumstances could subsequently give rise to claims. I presume that this policy like all policies of this type had a notice provision allowing the policyholder to give notice to the insurer of circumstances that may give rise to a claim and providing that if the subsequent claims do arise the subsequent claims are deemed made at the time of the notice. If as I assume was the case this policy had a notice of circumstances provision of this kind, it seems to me that Baum satisfied the notice requirements at the time of the initial  notice and that all the other arguments about the timeliness of notice are inapposite.

Setting to one side my argument about the timeliness of the notice of circumstances, there is an issue for carriers to consider in light of this opinion and the earlier New York intermediate appellate decision, which is whether they need to introduce into their policies a notice timeliness requirement for subsequent related claims. The Eighth Circuit was “unsympathetic” to the insurer’s concern that if there were no timeliness requirement  that the insured could give notice of subsequent related claims at any time, even years after the fact, on the grounds that it was not the Court’s role to “rescue an insurer from its own drafting decisions.” In other words, if the insurers don’t want policyholders to have an indefinite time within which to provide notice of subsequent related claims, then the insurers need to expressly identify the time requirements in their policies.

One final note. In his opinion, Judge Riley said that the Court would be “reticent” to apply New York’s “no prejudice rule” to cases where the insurer received timely notice of claim but arguably late notice of a lawsuit. I believe that the correct word in this context is “reluctant,” not “reticent.” The Miriam-Webster Dictionary defines “reticent” as “inclined to be silent or uncommunicative in speech; reserved.” The word “reluctant” is defined in the same dictionary to mean “feeling or showing doubt about doing something; not willing or eager to do something.”

Clearly the Eighth Circuit was feeling doubt, not inclined to be silent, about what the New York Court’s might do on the issues, so the word employed should have been “reluctant” not “reticent.”  (The reticent/reluctant confusion is one of the common errors I noted in a prior post on frequent word choice inaccuracies, here).

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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