The United States District Court for the District of Connecticut has held that an insured’s untimely notice of a claim precluded coverage under a claims-made policy because it prejudiced the insurer as required by Connecticut law. Zahoruiko v. Fed. Ins. Co., 2017 WL 776645 (D. Conn. Feb. 28, 2017).
The insured, an officer of a technology company, executed a note for a line of credit. A third party purchased the note a few years later and sued the insured for defaulting on it. The parties settled the matter by executing a new, second note. Several years later, the insured allegedly missed loan payments on the second note, so the parties entered into a forbearance agreement. The agreement delayed payments and waived some of the insured’s future defenses in the case of default. Two years later, the third party sued on the second note. After two additional years, the court granted summary judgment in favor of the third party.
The insured had two directors and officers claims-made policies. The insured notified its insurer for the first time of both lawsuits ten days after it learned that the third party intended to move for summary judgment. The insurer denied coverage, and the insured filed suit.
The court found no coverage for the first lawsuit because the demand letter preceding the suit was made during a lapse between the two policies. As to the second lawsuit, the court held that a related claims provision and a prior litigation exclusion did not apply because the lawsuits involved two separate notes. The court did conclude, however, that the insured’s notice of the claim was untimely, and as required by Connecticut law, prejudiced the insurer.
As to untimeliness, according to the court the insurer “offered undisputed evidence” that the insured did not notify it of the lawsuits until “ten days after learning that [the third party] intended to move for summary judgment, sixteen months after being served the [second lawsuit] complaint, 20 months after receiving a demand letter, and three years and nine months after signing a forbearance agreement with [the third party].”
The court also held that the insured’s tardiness materially prejudiced the insurer. In particular, the court held that the insured waived defenses in its forbearance agreement years prior to the lawsuit and incurred litigation costs without the participation of the insurer. By doing so, the court held that the insured failed to comply with the policy’s requirements and also hampered the insurer’s ability to negotiate “better repayment terms or from settling the lawsuit before the defense costs were incurred.”