Kansas Federal Court Holds Notice-Prejudice Rule Inapplicable to Claims-Made Policies

The United States District Court for the District of Kansas, applying Kansas law, has held that the notice-prejudice rule does not apply to claims-made policies. Philadelphia Indem. Ins. Co. v. Great Plains Annual Conference of the United Methodist Church, 2022 WL 522962 (D. Kan. Feb. 22, 2022).

A dispute arose between an insured church and a company that had purchased property from the church.  On July 15, 2020, the purchaser sent the church a proposed tolling agreement relating to the dispute, which stated that the purchaser had “discovered potential defects in the property for which it may seek recovery.”  The church provided notice of the dispute to its D&O insurer on April 16, 2021.  The purchaser subsequently filed suit against the church in August 2021, asserting claims for negligent and fraudulent misrepresentation and breach of contract.  After the church notified its insurer of the suit, the insurer filed a declaratory judgment action, contending that there was no coverage under either the 2020 or 2021 policies it issued to the church because the church failed to provide timely notice of the claim.  The church argued that there was coverage under both policies and that the insurer must demonstrate prejudice to avoid coverage based on a late notice defense.

The court held that there was no coverage under either of the policies.  First, the court concluded that the Kansas Supreme Court would not apply the notice-prejudice rule to claims-made policies.  The court noted that such application would “effectively defeat the event that triggers coverage in the first place and disturb the parties’ allocation of risk.”  Second, the court held that the church failed to give timely notice of the tolling agreement request under the 2020 policy, which required notice as soon as practicable and in no event later than 60 days after the expiration of the policy.  Because the church first notified the insurer of the claim more than 60 days after the policy’s expiration on January 1, 2021, the court held that the insured failed to comply with the policy’s reporting requirement.

Third, the court rejected the church’s argument that the claim should be covered under the 2021 policy based on the church’s first notice to the insurer in April 2021.  The court held that the July 2020 tolling agreement request constituted a “Claim,” defined to include “[a]ny written request to toll or waive any statute of limitations.”  Further, both policies provided that “[a]ll Loss arising out of the same Wrongful Act and all Interrelated Wrongful Acts . . . shall be deemed one Loss on account of one Claim” and “[s]uch Claim . . . shall be deemed to be first made or to have first occurred when the earliest of such Claims . . . were first made or first occurred.”  The court held that the claim regarding the dispute between the church and the purchaser arose at the earliest claim event—i.e., the July 2020 tolling agreement request.  Accordingly, because the Claim was deemed made under the 2020 policy rather than the 2021 policy, no coverage existed under the latter policy.  The court also rejected the insured’s argument that the tolling agreement had no legal effect, and thus was not a Claim, because the Kansas Supreme Court had issued an administrative order tolling all statutes of limitations due to the COVID-19 pandemic.  The court reasoned that the administrative order did not alter the terms of the policies, which state that tolling agreement requests constitute a Claim.

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