Almost all insurance policies require that an insured give timely notice of a loss, sometimes requiring that notice be provided as soon as practicable, or risk having the claim denied for the insured’s failure to meet a condition for coverage. This requirement is not exclusive to primary insurance policies as demonstrated by the U.S. District Court of Massachusetts, which recently held a failure to provide timely notice of a lawsuit to an excess carrier can also lead to a forfeiture of coverage under a “claims-made-and-reported” excess policy.
The underlying case that led to the District Court's holding was the widely publicized action, Students for Fair Admission v. President & Fellows of Harvard College, wherein Harvard’s admission practices were alleged to violate Title VI of the Civil Rights Act (the “SFFA Action”). The subsequent coverage action, styled President and Fellows of Harvard College v. Zurich Am. Ins. Co., 1:21-cv-11530-ADB (D. Mass.), considered Zurich’s denial of excess coverage to Harvard. Following the filing of the underlying lawsuit in September 2014, Harvard provided timely notice to its primary carrier, American International Group Inc. (“AIG”) which paid its $25 million limit on that primary policy. Following AIG’s release of its policy limit, on May 23, 2017, Harvard notified its excess carrier, Zurich Insurance Group AG (“Zurich”), of the lawsuit, and Zurich denied coverage based upon late notice. The Zurich Policy provided $15 million in coverage for claims made during the policy period, November 1, 2014, to November 1, 2015, and reported no later than ninety (90) days after the expiration of the policy period or no later than January 30, 2016.
Harvard filed suit seeking damages for breach of contract and a declaration that Zurich was required to reimburse Harvard for all reasonable defense costs. Responding to the coverage lawsuit, Zurich moved for summary judgment based on Harvard's noncompliance with the policy's notice requirements. In granting Zurich’s motion, the court noted that Massachusetts law interpreting insurance provisions was clear: (1) the unambiguous terms of an insurance policy are strictly enforced, and (2) an insured's failure to comply with the notice provision of a claims-made policy bars coverage. In addition, the court rejected Harvard's arguments that Zurich had constructive notice of the lawsuit because it “surely knew about the SFFA Action in the year after it was filed, especially given the significant, ongoing attention that the suit received in local and national news.” The court also held that the absence of prejudice did not provide any exception to the requirement of timely notice. Further, the court accepted Zurich’s position that there is no “wiggle room” to excuse noncompliance concerning the notice provisions in a claims-made policy.
Harvard appealed to the First Circuit, and Harvard's opening brief was filed on February 22, 2022. Therein, Harvard concedes that Zurich did not receive formal timely notice of the suit, yet asserts that permitting Zurich to deny coverage would allow other insurers to avoid their coverage obligations based on technicalities. Harvard further posits that Zurich had “actual notice” of the suit based upon the information garnered in the underwriting process, which occurred during the subject Zurich Policy’s reporting period, to set Harvard’s premiums for subsequent Zurich policies.
Harvard summarizes the error of the District Court as follows:
The District Court's ruling runs the risk of automatically foreclosing any policyholder for challenging an insurance company's attempt to impose forfeiture due to deficient notice under a claims-made policy. If insurance companies can now avoid their coverage obligations any time a claims-made policy condition is breached, regardless of how inconsequential the breach is or whether the purpose of the condition was met, then we need to be prepared for what comes next. The already overly complex policies that insurance companies sell will accrue new and seemingly innocuous “conditions precedent” – traps for the unwary that will e spring lang after premium checks have been cashed, leaving policyholders without the equitable protection that the SJC has held must be taken into account when forfeiture is at stake.
Harvard concludes that allowing automatic forfeiture “sets a destructive precedent for insurance consumers across the Commonwealth.”
In its brief, Harvard relies heavily on Chas. T. Main, Inc. v. Fireman's Fund Ins. Co ., 406 Mass. 862, 551 N.E.2d 28 (1990) for the proposition that the District Court was required to consider whether the purpose of the notice condition in the policy was met before permitting the remedy of forfeiture. In Chas. T. Main, Inc., the court determined that the purpose of the notice provision was to produce “fairness in rate setting” by minimizing “the time between the insured event and the payment.” However, the Chas. T. Main, Inc. Court also concluded that the Massachusetts notice-prejudice statute did not apply to a claims-made-and-reported policy because “[a] requirement that an insurer on a claims-made policy must show that it was prejudiced by its insured’s failure to report a claim within the policy period, or a stated period thereafter would defeat the fundamental concept on which claims-made policies are premised.”
Harvard attempts to distinguish the Chas. T. Main, Inc. by claiming that documents produced by Zurich prove that it had actual knowledge of the SFFA Action and acted upon that knowledge by setting rates using it. Specifically, Harvard identifies “deal memos” that refer to attached news articles, litigation summaries, loss runs, loss data, and the monitoring of “notable” litigation in support of its argument that Zurich cannot “feign” ignorance to avoid its coverage obligation.
The Court of Appeals recognized that claims-made-and-reported policies contain strict reporting requirements that are a condition precedent to coverage because the reporting requirements simplify an insurer's reserving practices and reduce uncertainty in pricing, which translates to lower premiums for policyholders.
Comment: In Massachusetts, there is long-standing law that claims-made-and-reported policies contain strict reporting requirements that are a condition precedent to coverage attaching because the reporting requirements simplify an insurer's reserving practices and reduce uncertainty in pricing, which translates to lower premiums for policyholders. On appeal, Harvard is arguing that overturning the district court’s order would protect policyholders and small businesses against future attempts by insurers to deny coverage based on mere technical breaches of policy conditions. If the court accepts Harvard’s arguments that Zurich should accept a claim reported outside of the policy period, however, then it will constitute an impermissible gratuitous expansion of coverage beyond the relevant policy period, which is not a mere technicality. Indeed, insureds are often hesitant to report claims if they do not believe that the excess layer of coverage will be triggered or to avoid a premium increase by reporting a claim where the excess policy may never be needed.
This case highlights the importance of claims professionals knowing which policies are claims-made-and-reported and ensuring insureds have complied with the policy requirements for timely notifying insurers of potentially covered claims.