In a significant victory for Wiley Rein’s client, a Tennessee federal court has held that an insured’s “general, boiler-plate . . . broad, [and] non-specific” notice that purported to give notice of a potential claim was untimely and insufficient to provide notice of an actual claim made during the policy period and omitted from the notice.  First Horizon Nat’l Corp. v. Houston Cas. Co., No. 15-cv-2235-SHL-dkv (W.D. Tenn. June 23, 2017).  In so ruling, the court held that an email that “stated [a] settlement offer of $610 million and requested a counterproposal from” the insured was a written demand for monetary relief, and thus a “Claim,” that should have been reported to the insurers.  Wiley Rein represents the primary carrier and argued the motions before the district court.

A bank was investigated by the U.S. Department of Justice (“DOJ”) for alleged violations of the federal False Claims Act.  In May 2013, prior to the inception of the policies at issue, the DOJ made a presentation to the insured that included “a summary of preliminary findings that [the insured] was in violation of the [False Claims Act].”  The presentation also stated that “the investigation and settlement discussions would continue.”  The presentation was then emailed to the bank, which did not provide a copy or otherwise give notice to its E&O insurers.  Those E&O insurers subsequently issued renewal policies to the bank.

In April 2014, during the period of those policies, a DOJ attorney conveyed an oral settlement offer by phone for damages in the amount of $610 million, which was confirmed in writing via email.  The email stated that the insured “should provide a counterproposal” to the offer.  The next month, the insured provided a notice regarding the investigation to its E&O insurers.  The notice was specifically described as a “notice of circumstances that may give rise to a claim” (“NOC”) and stated that the matter “could lead to a demand or claim under the federal False Claims Act.”  The notice did not mention the $610 million settlement proposal.  Months later, subsequent to the policy period, the insured provided notice of a claim to the insurers, asserting that the claim was first made in a December 2014 presentation that reiterated the $610 million settlement offer and stated that the DOJ “plan[ned] to file suit unless [it] receive[d] a serious settlement offer” in response.

The bank settled for $212.5 million and sued the E&O tower for coverage.  The insurers denied coverage on the grounds that, inter alia, the claim was made prior to the policy period, or alternatively was first made during the policy period but not properly noticed to the insurers.  The court ultimately granted the insurers’ cross-motion for summary judgment in material part, dismissing the case.

The court first considered whether the claim had been made prior to the policy period.  The court held that the May 2013 presentation did not “quite” constitute a claim, observing that while the presentation did assert that the bank had violated the False Claims Act, it also stated that the investigation was still “ongoing” and involved a small sample of loans.  However, the court held that the presentation “does, however, at a minimum, constitute the first ‘circumstance[] which may reasonably be expected to give rise to a Claim,’ sufficient to trigger a NOC by Plaintiffs in that policy period, should they have chosen to do so.”

The court next considered whether the April 2014 $610 million settlement proposal constituted a written demand for monetary relief, and thus a “Claim,” under the policies.  The bank argued that the settlement offer was not a “formal” offer, but rather a “methodology to calculate damages,” and therefore not a demand.  The court disagreed, holding that the email was the first “Claim” made by the DOJ.

Finally, the court considered whether the NOC provided during the policy period was sufficient notice under the subject policies.  The court held that it was not, which entitled the insurers to summary judgment and dismissal of the coverage complaint.  First, the court held that the NOC was not timely submitted.  The policies required that a NOC be submitted, if at all, during the policy period in which the bank first became aware of circumstances that may be reasonably expected to give rise to a “Claim.”  The court held that the first such circumstances occurred no later than the May 2013 presentation, before the policies’ inception, and that the NOC was thus untimely.

Second, the court held that the NOC was not sufficient notice of the $610 million settlement proposal—the first “Claim.”  The court held that the notice was insufficient because it omitted mention of the settlement proposal and other significant developments and therefore was “not reflective of the state of affairs at the time.” The court stated that “[t]he general, boiler-plate type language contained in the NOC was not sufficient notice of this Claim,” and that to permit the bank to rely on the NOC as notice of the settlement proposal would “defeat[] the policy behind a claims-made policy, wherein the purpose of the notice requirement is to inform the insurer of its exposure to coverage.”  The court also rejected the bank’s argument that the insurers had waived their right to contest the NOC, noting that the insurers had “no knowledge that a Claim had occurred here” and therefore could not have knowingly relinquished that coverage defense.

The court also held that a Civil Investigative Demand and subpoena did not constitute a “Claim” under the policies at issue, and that the claim by DOJ was not sufficiently interrelated to a prior loan underwriting claim to fall within the scope of the insured’s release of the insurers that funded the settlement of the earlier claim.