6th Circuit Affirms No Coverage Where Insured Concealed Claim and Underlying Facts Before Giving Untimely Notice of Claim

In a case that was briefed and argued for the primary carrier by Wiley Rein at the trial court level and on appeal, the U.S. Court of Appeals for the Sixth Circuit unanimously affirmed summary judgment on behalf of the insurers where the insured bank concealed key facts concerning a government investigation until the eve of settlement, holding that the insured failed to provide timely notice of a Claim or adequate notice of a potential Claim.  First Horizon Nat’l Corp. v. Houston Cas. Co., No. 17-5767/5844 (6th Cir. July 10, 2018).

The insured bank was the subject of a False Claims Act (FCA) investigation by U.S. Department of Justice (DOJ) and the U.S. Department of Housing and Urban Development (HUD), which alleged that the bank had submitted false claims for FHA mortgage insurance.  The government’s investigation began in 2012, and in May 2013, representatives from the government met with the insured in person and presented a 35-page presentation outlining the insured’s violations of the FCA, including that 67.1% of the loans for which it sought insurance contained serious, undisclosed deficiencies, and articulating “theoretical damages and penalties” upward of $1.19 billion.  DOJ and the insured entered into a tolling agreement in which DOJ agreed not to file “a civil action against [the insured] under the False Claims Act” while the parties engaged in settlement discussions.  Then, in April 2014, DOJ made a $610 million settlement demand by telephone, which it confirmed in a lengthy email that explained the bases for liability and damages and repeatedly referred to DOJ’s “settlement offer.”  Shortly thereafter, DOJ stated that it could not “push back the date by which we agree to file suit beyond June.”

In May 2014, the insured provided a Notice of Circumstances (NOC), which stated that it “has been cooperating” in a civil FCA investigation and had “provided certain information” to DOJ but that the matter was still in “preliminary” stages.  The NOC did not mention the May 2013 presentation or any of the information contained in it, and it did not mention the $610 million settlement demand the insured had received the previous month.  By September 2014, the insured had determined that it would make an initial settlement offer of up to $50 million, which it set aside for that purpose.  Again, the insured told the insurers nothing.

DOJ met again with the insured in December 2014, reiterated its $610 million settlement demand, and stated that it intended to file suit if the insured did not provide a “meaningful response.”  The insured contended that this presentation was the first Claim as defined in the applicable policy.  Nonetheless, the insured provided updates on all claims and potential claims, including this one, in July and October 2014 and January 2015.  Each time, including (“oddly,” in the court’s words) in January 2015, the insured advised the insurers that no demand or claim had been made.

The bank finally provided notice of the Claim on February 25, 2015, asserting that the December 2014 presentation was a Claim that related back to the May 2014 NOC.  The bank ultimately settled the Claim for $212.5 million and sought coverage from its E&O insurers.  The insurers never actually denied coverage but reserved their rights to do so on a number of grounds, including that the Claim was made prior to the policy period or, alternatively, was first made during the policy period but not properly reported to the insurers.  Shortly thereafter, the insured filed coverage litigation.

The Sixth Circuit unanimously affirmed summary judgment in favor of the insurers.  First, the appellate court rejected the bank’s arguments that the $610 million settlement demand was not a “Claim” under the Policy, concluding that the April 2014 email outlining the settlement offer was a written demand for monetary relief and that the government’s willingness to continue settlement negotiations did not negate the existence of such demand.  The court found that the insured’s arguments were “contradict[ory],” and that testimony of the insured’s counsel that the April 2014 email was not a settlement demand did “not put the meaning of the email into reasonable dispute” (emphasis in original).

Additionally, the court held that the May 2014 NOC was neither timely nor adequate notice of the Claim.  The court concluded that the NOC was not timely because a reasonable person would objectively have expected the information in the government’s May 2013 presentation to give rise to a Claim, noting that “a reasonable person would expect exactly that.”  To the extent the bank wished to give notice of a potential Claim, it had to do so during the policy in effect in May 2013.  Rejecting the insured’s argument that notice could be given when the insured learned of any such facts, not necessarily the first such facts, the court held that “there is simply no way to read [the NOC] provision as [the insured] urges.” The court also held that the NOC was not adequate notice of a Claim—namely, the April 2014 $610 million settlement demand—because the NOC referenced only a potential demand or claim and emphasized the absence of any Claim.

The court also rejected the bank’s arguments that the insurers had waived the right to contest the adequacy of the NOC by failing to raise such deficiencies at the time, concluding that the bank had assured the insurers that there had been no demand, and “[t]he insurers could not waive anything that [the insured] concealed from them.”


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