Applying New York law, the United States Court of Appeals for the Eighth Circuit held that an insured’s untimely notice of numerous claims did not violate the policy’s notice requirement because the claims are related to, and constitute a single claim with, an earlier claim that was timely noticed.  George K. Baum & Co. v. Twin City Fire Ins. Co., 2014 WL 3445713 (8th Cir. July 16, 2014).

In 2003, a company notified its professional liability insurer that it was being investigated by the Internal Revenue Service (IRS) in connection with the company’s activities as an underwriter and seller of municipal bonds.  Years later, after the IRS investigation had been settled, the company was named as a defendant in dozens of lawsuits alleging wrongdoing by the company in connection with the sale of municipal derivatives.  The company’s insurance policy provided that, when a claim is made and reported during the policy period, all subsequent related claims will be deemed made at the time of the initial claim, and the claims “shall be considered a single Claim for all purposes.”  Despite the fact that the derivatives litigation complaints were related to and thus a single claim with the IRS investigation, the company did not provide notice of these complaints to the insurer until over two years after the first complaint was filed.  As such, after finally receiving notice, the insurer denied coverage for the derivatives litigation complaints based on the company’s failure to comply with the policy’s requirement that all claims be noticed to the insurer “as soon as practicable.”

In the appeal of the ensuing coverage litigation, the court first addressed the choice of law question.  The company argued that Missouri law applies to this dispute because it is a Missouri corporation, and Missouri law requires an insurer to demonstrate prejudice to deny coverage based on late notice.  The insurer argued that New York applies because the policy was issued to the company’s New York office at the company’s request so that the company could avoid paying Missouri surplus lines taxes, and because the policy included a New York amendatory endorsement with New York-specific provisions.  The court agreed with the insurer, finding that New York law, which at the relevant time did not require an insurer to demonstrate prejudice based on late notice, governs the policy’s interpretation.

Nevertheless, the court concluded that the company’s undisputed late notice of the derivatives litigation complaints does not bar coverage for those complaints because the company gave timely notice of the original IRS investigation.  According to the court, because the policy provides that related claims are related “for all purposes,” all subsequent claims related to the IRS investigation (including all of the derivatives litigation complaints) constitute a single claim with the IRS investigation “for all purposes,” including notice.  Thus, the court held that the company’s timely notice of the IRS investigation suffices as timely notice of all subsequent related claims.

Finally, the court addressed the issue of the applicable retention.  The policy contained a $1 million retention, except with respect to “any CLAIM  based upon, arising out of, directly or indirectly, resulting from, in consequence of, or in any manner relating to the INSUREDS’ activities as an underwriter or seller of municipal bonds,” for which a $3 million retention applied.  The company did not dispute that the $3 million retention initially applied to the IRS investigation in 2003, but it argued that the derivatives litigation complaints did not involve underwriting and selling of municipal bonds and thus a $1 million retention must apply.  The court disagreed, finding that the derivatives litigation complaints are covered under the policy only because they arose from the same underlying acts as the IRS investigation.  Thus, the court held, as related claims are a single claim “for all purposes,” the derivatives litigation complaints and the IRS investigation are subject to the same $3 million retention.