Notice Provisions in Claims-Made Policies: Can the Insured Make a Coverage Determination Before Givin
Aug 12, 2002
In National Union Fire Insurance Company of Pittsburgh, PA v. Willis, No. 01-20723, 2002 WL 1369092 (5th Cir. July 16, 2002) (Tex. law), the Fifth Circuit construed notice provisions in claims-made policies. An insurer issued three separate directors, officers, and corporate liability claims-made policies to the insured (the 1998, 1999, and 2000 policies). A lawsuit was filed against the insured during the 1998 policy period asserting claims for common law fraud, fraud in the inducement, statutory fraud, tortious interference with contract, and conspiracy. The insured did not give notice to the insurer of the lawsuit during the 1998 policy period.
In a fourth amended complaint filed during the 2000 policy period, plaintiffs added a negligent misrepresentation claim against the insured. The negligent misrepresentation claim was based upon the same facts as alleged in the original complaint. The insured gave notice of the negligent misrepresentation claim to the insurer during the 2000 policy period. The insurer rejected the claim and filed a declaratory judgment action in a federal district court in Texas contending that notice of the claim was untimely given under the 2000 policy, and that the insured was not entitled to coverage under any of the three policies.
The district court agreed with the insurer, and stated that the insured should have given notice to the insurer in 1998 when he was first made aware of circumstances that could reasonably be expected to give rise to a claim against him. The court held that exclusion 4(e) of the 2000 policy barred coverage for the insured under that policy because the negligent misrepresentation claim arose out of pending or prior litigation, or derived from the same or essentially the same facts as alleged in the pending or prior litigation. The court concluded that the insured was therefore not entitled to coverage under any of the three policies and granted summary judgment in favor of the insurer.
On appeal, two interesting arguments were made on behalf of the insured. The insured argued that the district court had to distinguish between claims alleging intentional conduct and claims alleging negligent conduct. The insured argued that he was not required to give notice of the lawsuit during the 1998 policy period because the intentional torts asserted against him in the original complaint were barred from coverage under the 1998 policy by a policy exclusion. The insured therefore argued that he was not required to give notice of the claim until after the negligent misrepresentation claim was asserted against him in 2000. The insurer contended that the policies do not limit the notice provisions to covered claims, and that if an insured is free to make its own coverage determination, the notice provisions in claims-made policies will become meaningless.
The Court of Appeals agreed with the insurer, and noted that the gist of the original petition's factual allegations were that the insured made misrepresentations, omissions, and false promises. The court stated that these factual allegations implicated the 1998 policy under which the insurer is obligated to "pay the loss of each and every director or officer of a company arising from a claim…for any actual or alleged wrongful act." The court held that whether a director or officer ultimately is found to have committed a wrongful act based on the legal theory of tortious conduct, be it intentional or negligent, is irrelevant for requiring notification under a claims-made policy. It was also argued by the insured that the negligent misrepresentation claim asserted in the fourth amended complaint gave rise to a new theory of recovery that is a separate claim governed by the 2000 policy. The insurer counter-argued that the insured should have given notice of the claim during the 1998 policy period because the negligent misrepresentation claim is part of the initial lawsuit and falls under the 1998 policy.
The Court of Appeals stated that amended complaints cannot commence a civil proceeding that has already been commenced, especially when, as in this case, the amended complaint was based on identical facts as those used in the original complaint. The court therefore held that the insured was required to notify the insurer of the claim during the 1998 policy period, and because he did not report the claim during the 1998 policy period, his claim was not within the 1998 policy's coverage. The Court of Appeals also agreed with the trial court's holding that the insured's claim under the 2000 policy was barred by exclusion clause 4(e) of that policy. The insured was therefore not entitled to coverage under any of the three policies and the insurer was entitled to summary judgment.