The U.S. District Court for the Eastern District of Kentucky recently held that an insurer properly denied coverage to a hospital because the hospital gave untimely notice of the claim. In Ashland Hospital Corporation v. RLI Insurance Company, Civil Action No. 13-143-DLB-EBA (E.D. Ky. Mar. 17, 2015), the insurer avoided exposure on a $10 million directors and officers (D&O) excess policy claim by successfully arguing that the insured, a hospital association, failed to give timely notice of the claim as required under the terms of the policy.
The hospital purchased $15 million in primary D&O liability insurance for Oct. 1, 2010, through Oct. 1, 2011. The hospital also purchased a $10 million excess policy from another insurer covering the same one-year period. Both policies were written on a “claims-made” as opposed to an “occurrence” basis. In July 2011, the U.S. Department of Justice issued a subpoena to the hospital as part of a Health Insurance Portability and Accountability Act (HIPAA) investigation into allegations that the hospital billed federal healthcare programs for heart procedures that were not medically necessary. Ultimately, the hospital agreed to pay $40.9 million to resolve the allegations.
The hospital notified the primary carrier of the HIPAA investigation in December 2011, which was within the 90-day notice period required by the primary policy. In June 2012, after being informed that the primary carrier’s policy covered the investigation, the hospital notified the excess insurer of the HIPAA investigation. The insurer denied coverage because the hospital failed to provide timely notice during the policy period or within the applicable 90-day extended reporting period after the policy terminated in October 2011. The insurer claimed that the notice requirement was a condition precedent to establishing coverage and that it did not have to show prejudice to deny coverage. The hospital sued for breach of the insurance contract.
The insurer argued that it correctly denied coverage because the hospital failed to provide notice within the 90-day extended reporting period after the excess policy expired. The insurer argued the excess policy followed form to the primary policy, thereby incorporating the notice provisions of the primary policy that required notice within 90 days of the end of the policy. The hospital admitted the excess policy did follow form to the primary policy but claimed that the presence of notice provisions in both policies made the primary policy’s notice provisions ambiguous.
The Ashland court rejected the hospital’s argument, holding that the notice provisions in the primary and excess policies did not conflict; to the contrary, they coexisted. Therefore, the insurer’s denial of coverage was proper because the hospital failed to provide timely notice as required by the terms of the primary policy.
The court also held that the hospital violated the notice provisions of the insurer’s excess policy, which required the insured to provide notice when specified events occurred. The hospital claimed that the notice provisions were ambiguous and did not require it to provide the insurer with notice every time an event specified in the notice provisions took place, but rather only when the most recent event occurred. The insurer countered that the terms of the policy were clear and that the hospital was required to provide notice when any event specified in the policy took place. The insurer contended that, because the hospital provided notice only when the most recent event occurred and not when previous events occurred, the hospital was not entitled to coverage. The Ashland court held that the provisions were not ambiguous and that adopting the hospital’s interpretation would effectively render the terms meaningless. The court agreed with the insurer that for coverage to exist, the hospital had to provide timely notice to the insurer when all of the events specified by the provision took place, not merely when the most recent event occurred. Because the hospital failed to do so, it forfeited its right to coverage under the terms of the excess policy.
The Ashland court also considered and rejected the hospital’s alternative argument that the insurer had to show substantial prejudice to deny coverage. In so arguing, the hospital relied on Jones v. Bituminous Casualty Corporation, 821 S.W.2d 798 (Ky. 1991), which held that absent a showing of substantial prejudice a workers’ compensation insurer could not deny coverage because of an insured’s untimely compliance with a notice provision. The Ashland court noted that Kentucky courts have not addressed whether Jones applied to claims-made insurance policies but predicted that the Kentucky Supreme Court would not extend Jones to a claims-made policy because to do so would effectively rewrite the policy without justification.
There are two principal takeaways from the Ashland decision:
- First, in Kentucky, excess insurers desiring to “follow” a primary policy would be well-advised to use language that ensures neither policy conflicts. While not mentioned by the Ashland court, a simple way to accomplish this result would be for the excess policy to include language in the “following form” clause confirming that, in the event of any conflict between the primary and excess wording, the primary language should control. Failure to take these steps could render some terms of the policies ambiguous and unenforceable.
- The second takeaway concerns the Ashland court’s sustaining the enforceability of the claims-made and reporting provisions of the policy. Earlier this year, the state supreme courts in Colorado and Wisconsin reaffirmed that the claims-made and reporting requirements in D&O and professional liability policies are conditions precedent to coverage that cannot be trumped by the notice prejudice rule applicable to occurrence-based policies. (See Craft v. Philadelphia Ins. Co., 2015 CO 11 (Colo. Feb. 17, 2015); Anderson, et al. v. Aul, et al., 2015 WI 19 (Feb. 25, 2015). Thus, Ashland is illustrative of a continuing trend of recent decisions that have reached this same conclusion.
Wilson Elser will continue to monitor this and other cases involving primary and excess policy coverage disputes.
NOTE: Patrick C. Walsh (Law Clerk-Louisville) assisted in researching and drafting this Alert.