Ninth Circuit Holds Notice-Prejudice Rule Inapplicable to Claims-Made-And-Reported Policies

Applying Montana law, the Ninth Circuit Court of Appeals has held that a claim made during one claims-made policy period but not noticed until a second policy period was not covered under either policy. Capitol Specialty Ins. Corp. v. Big Sky Diagnostic Imaging, Inc., 2021 WL 1564349 (9th Cir. Apr. 21, 2021).  The court also ruled that the notice-prejudice rule does not apply to claims-made-and-reported policies when the claim is reported after the policy period.

The insured, a diagnostic imaging center, sought insurance coverage for a medical malpractice lawsuit filed against it in the second of two consecutive claims-made policy periods.  During the prior policy period, the claimant had filed an application with the Montana Legal Panel for review, which under Montana law is a prerequisite to filing a medical malpractice lawsuit. The insurer denied coverage under the policy issued for the 2015-2016 policy period (the 2015 Policy) because the insured did not provide notice of the application with the Panel during the 2015 Policy’s policy period and denied coverage under the policy issued for the 2016-2017 policy period (the 2016 Policy) based on the 2016 Policy’s prior knowledge exclusion.

The Ninth Circuit affirmed the district court’s finding of no coverage under both policies. First, with respect to the 2016 Policy, the court held that the insured first received notice of a claim against it during the 2015 Policy’s policy period, when it received notice of the pre-suit application filed against it with the Montana Legal Panel. The court concluded that because the insured did not notify the insurer of the claim against it during the 2015 Policy’s policy period, despite the 2015 Policy’s requirement that “Claims must be first made against the Insured and reported to CSIC during the Policy Period,” no coverage was available under the 2015 Policy. The court found unpersuasive the insured’s argument that the notice-prejudice rule should apply, finding the notice-prejudice rule inapplicable to claims-made insurance policies under Montana law. The court further rejected the insured’s request to certify the question of whether the notice-prejudice rule applies to claims-made policies to the Montana Supreme Court, finding it unlikely that the Montana Supreme Court would have decided differently based on Montana precedent.

The court also determined that no coverage existed under the 2016 Policy pursuant to the 2016 Policy’s prior knowledge exclusion. Applying a mixed subjective-objective standard, the court held that the prior knowledge exclusion barred coverage under the 2016 Policy because the insured “knew, had been told, or should have known” of a claim against it at the time it contracted with the insurer for the 2016 Policy.