Seventh Circuit Weighs in on Timely Notice under a Claims-Made Insurance Policy
A “Claims-Made” insurance policy typically requires an insured to notify its insurer of a claim made against it during the policy period in which the claim was made and/or in a specified time period shortly thereafter. If the insured fails to timely report the claim pursuant to the policy’s terms, the insurer may owe no duty to defend or indemnify the insured. Denials of coverage due to an alleged failure to timely report a claim to the insurer have become commonplace and the basis of a significant amount of insurance coverage litigation. Insureds must pay close attention to the language of their policies, the facts and circumstances of any potential claim made against them, and the applicable law to ensure they proactively protect their rights to coverage under the insurance policy they purchased.
In Hanover Insurance Company v. R.W. Dunteman Co., 51 F.4th 779 (7th Cir. 2022), the Seventh Circuit Court of Appeals recently weighed in on whether an insurance claim was made timely under a Claims-Made Policy. In R.W. Dunteman, a company insured did not report a claim to its insurer, Hanover, when initially sued in August 2017 by the estate of a deceased shareholder seeking a declaratory judgment regarding her ownership interest. In July 2018, after the estate sought leave to file an amended complaint, adding new counts and new defendants, including the company’s directors and officers, the company and its directors notified Hanover, seeking coverage under its then-current D&O Policy. Hanover denied coverage on the basis that the notice was untimely as the insureds had failed to provide notice under the D&O Policy in effect when the estate’s lawsuit was first filed in August 2017.
Hanover then initiated a coverage action seeking a declaration that it did not owe a defense or indemnity to the company or its directors based on the untimely notice of the estate’s lawsuit. The insureds filed a counterclaim for breach of contract. The case was submitted on cross-motions for judgment on the pleadings.
The U.S. District Court for the Northern District of Illinois entered judgment in favor of Hanover, holding that the estate’s original 2017 complaint qualified as a claim under the 2017 policy because it contained allegations of wrongful acts against the company, an insured. The District Court further concluded that the allegations in the amended complaint in the same civil action did not create a new claim, and were related to the allegations in the original complaint, so they were treated as a single claim. Accordingly, the 2018 notice to Hanover was too late, and Hanover had no duty to provide coverage to the company or its directors.
The Seventh Circuit affirmed. First, the Seventh Circuit held that a claim for declaratory judgment can constitute a claim under a D&O Policy, where “claim” is defined to include a “civil proceeding commenced by the service of a complaint” against an insured “for a Wrongful Act.” As the estate’s original complaint sought a declaration as to the estate’s ownership interest in the company, while making allegations that the company improperly reduced the deceased’s shares without consideration and without her knowledge, those allegations “fit comfortably within this definition” of a Wrongful Act (which includes “any…alleged act, error, omission…neglect, [or] breach of duty” by an insured).
The Seventh Circuit continued: “The reporting obligation does not depend on the specific remedies that the plaintiff requests in the underlying litigation. Nor is it relevant whether the suit could have led to a compensable loss. The policy’s reporting requirement kicks in when an insured receives notice of a claim against it, including the filing of a civil action alleging any wrongful act.”
The Seventh Circuit then concluded that the allegations in the original and amended complaint are connected because they concern the insureds’ alleged wrongful reduction of the deceased’s ownership interest in the company. “Under the policy’s aggregation provisions, the “claim” encompassed the estate’s initial allegations and subsequent elaborations.” The fact that new defendants (i.e. the individual directors and officers) were named for the first time in the amended complaint is irrelevant as the new theories of relief brought against them are “based upon” or at least “related to” the common scheme to diminish the deceased’s interest in the company, as alleged in the original complaint.
Judge Hamilton wrote, in his concurrence, that “this decision creates a powerful incentive for any company with a claims-made D&O policy to give the insurer notice of even the most minor claims, including those against only the company. As this case shows, an initial claim that looks minor and manageable can sometimes morph into a monstrous threat not only to the company but also to individual directors and officers personally. If that happens, failure to give notice of the original minor claim against only the company will leave the insureds without defense or coverage for the larger threat that emerges later.”
For policyholders, it is important to review the language of your policies to determine what can constitute a claim, and talk to your insurance brokers and/or other advisors to timely provide notice of any claims.