Insured’s failure to timely report claims under a claims-made D&O/BPL policy precluded injured party’s right of direct action against insurer

by Christopher Graham and Joseph Kelly

Louisiana map

Grubaugh v. Central Progressive Bank (E.D. La. Dec. 18, 2013 Dec. 17, 2013)

This is a case where a Court strictly enforced the reporting requirement of a claims-made policy and barred an injured party’s direct action right because of the insured’s failure to timely report a claim.

Customer claimed two bank employees, namely, his mother and sister, stole over $70,000 from his account. In June and July, 2008, he sent complaint letters to the FDIC and Louisiana bank regulator. Customer asked the FDIC to “help me get my money back from the bank for the forged checks, unauthorized debit memos, unauthorized payment of bills that do not belong to me, [and] unauthorized disbursement of my social security checks.” In his complaint to the Louisiana regulator, customer stated that the relief he sought was “having my money returned to me and having someone that can do that from [the bank] contact me.” The two regulators notified the bank promptly thereafter.

The bank had a claims-made D&O/bankers professional liability policy, effective from February 1, 2007 through November 15, 2009, and issued by Executive Risk. “Claim” under the D&O coverage section included, among other things, “a written demand for monetary damages . . . against an Insured Person for a Wrongful Act” as well as “a formal civil administrative or civil regulatory proceeding commenced by the filing of a notice of charges or other similar document or by the entry of a formal order of investigation or similar document . . . against an Insured Person for a Wrongful Act.” The policy also provided that a “Claim will be deemed to have first been made when such claim is commenced as set forth in this definition or, in the case of a written demand, when such demand is received by an Insured.” Under the BPL coverage section, the Claim definition varied slightly, in that a Claim as otherwise defined must be brought “by or on behalf of a Customer against an Insured for a Wrongful Act.”

The policy provided further that:

the Insured shall, as a condition precedent to exercising any right to coverage under this Coverage Section, give to the Company written notice of a Claim as soon as practicable, but in no event later than […] sixty (60) days after the date on which any insured first becomes aware that the Claim has been made.

Notice requirements such as the one above are in all types of liability policies, but in occurrence policies they generally are for reporting an occurrence and a suit. For claims-made policies, they are for reporting a Claim, but sometimes the deadline isn’t absolute or it’s for a set period such as 90 days following the Policy Period, and there’s separate wording for reporting a circumstance that may lead to a future Claim. The bank’s policy had a rather short 60 day absolute reporting deadline.

But the bank didn’t notify the insurer that it received customer’s complaint letters within 60 days of receiving them from regulators. Nearly a year thereafter, the customer sued the bank, unnamed bank officers, employees and others, and unnamed liability insurers for breach of contract and negligence. The bank notified its insurer promptly. That was the insurer’s first notice of customer’s allegations.

Over two years later, after the bank failed, customer filed an amended complaint, naming as additional defendants, the bank’s holding company, the FDIC as the bank’s receiver and, under Louisiana’s Direct Action statute, the D&O/BPL insurer. Louisiana is one of several states having a statute permitting an alleged injured party to sue an insurer and its insured simultaneously.

But the Court entered summary judgment for the insurer: the injured customer’s Direct Action rights were no greater than the rights of the insureds, who had no coverage. Customer’s mid-2008 complaints with banking regulators were Claims as defined by the policy, triggering the insured bank’s reporting obligation within 60 days of learning of them; the bank, by waiting about a year to notify the insurer, had no coverage and neither did customer.

According to the Court, customer’s complaints to regulators, which were forwarded to the bank, “could be considered a ‘written demand for monetary damages’ . . . .” “Black’s Law Dictionary defines a demand as the ‘assertion of a legal or procedural right.'” “[T]here is no requirement that [the customer] submit the demand directly to [the bank] and/or [holding company]. Rather, in the case of the D&O coverage section, the demand need only be made against [them] and received by [them], which is exactly what happened here. [Customer] demanded from [bank] what he alleges is legally due to him, and that demand was received by [the bank]. Further, under the BPL Coverage Section, the demand may be made by or on behalf of [the customer]. In this case, the FDIC and the OFI submitted [customer’s] demand on his behalf, thus a claim was made.”

In addition:

[The bank’s] duty to notify [the insurer] was triggered on July 11, 2008 for the FDIC complaint and July 22, 2008 for the [Louisiana regulator’s] complaint, long before [the insurer] received notice of the claim in July 2009 and long after the sixty day reporting period had elapsed. By breaching this requirement, [the bank] failed to comply with a condition precedent of the Policy and coverage was never triggered.

The bank had no coverage; so neither did the “injured” customer. Whether the insurer was prejudiced by the untimely reporting didn’t factor into the Court’s decision; it’s not even mentioned. Numerous decisions in fact strictly enforce reporting requirements in claims-made policies without regard to prejudice. See, e.g., U.S. v. A.C. Strip, 868 F.2d 181 (6th Cir. 1989); Pantropic Power Prods v. Fireman’s Fund Ins. Co., 141 F.Supp.2d 1366 (S.D.Fla. 2001).

The Court also rejected the customer’s waiver and estoppel argument, concluding “there is no evidence that [the insurer] ever took any other steps that were contrary to their intent to deny coverage.”

Moral of story for brokers, risk managers, and insureds: Promptly report to the insurer anything that smells like a Claim or potential Claim, even if you’re not sure about it’s nature. You have nothing to lose and the consequences of failing to report can be no coverage. Perhaps the bank employees receiving the regulators’ notice didn’t take the customer “complaints” seriously, particularly as they involved “theft” by the customer’s mom and sister. The bank did take things seriously when it was sued, much later – but by then it was too late. You might also consider a policy with a more-insured friendly notice provision.

Moral of the story for “injured parties” and their counsel: Your ability to collect may be only as good as your target defendant’s insurance. When your target fails to provide timely notice to the insurer, you may have no way to collect. To avoid this scenario, plaintiffs’ counsel will advise the target to provide it’s insurer notice promptly or, if possible, also will put the insurer on notice directly.

Moral of the story for insurers: A specific reporting requirement in a claims-made policy often will be strictly enforced, regardless of whether the insurer was prejudiced by delay. That scenario frequently isn’t the case for occurrence-type liability policies.

Tags: Louisiana, D&O, professional liability, direct action, notice

Category: D&O Digest, Professional Liability Insurance Digest Comment »

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