Kentucky Supreme Court Holds Prior Notice Exclusion Does Not Bar Coverage for Claims Related to Investigation Noticed and Accepted by Prior Insurer
Applying Kentucky law, the Kentucky Supreme Court has held that a prior notice exclusion did not bar coverage for a claim related to a government investigation noticed and accepted by a prior insurer because the insurers were notified of the investigation, advised that notice of the investigation failed to constitute adequate notice of circumstance, and failed to inform the insured that the prior notice exclusion specifically operated to preclude coverage for claims related to the investigation. Ashland Hosp. Corp. v. Darwin Select Ins. Co., 2022 WL 12198051 (Ky. Oct. 20, 2022).
In 2011, the insured medical center was the subject of a DOJ subpoena that sought documents, including those relating to revocations of hospital privileges, disciplinary proceedings, and medical malpractice complaints, involving potential health care offenses. The medical center provided notice to its D&O insurer, which accepted coverage to defend the subpoena and related investigation. The medical center’s professional liability and excess liability insurers were made aware of the subpoena and investigation in connection with the underwriting of their 2012-2013 policies. It ultimately was determined that the DOJ was investigating alleged unnecessary cardiac operations.
During the 2012-2013 policy period, the medical center provided notices to its professional liability insurer of the subpoena and investigation, as well as a litigation hold letter from counsel representing hundreds of potential claimants regarding cardiac procedures. The insurer advised that neither notice constituted proper notice of circumstances that could give rise to a claim under the relevant provision of the policy. The insurer also asserted that the subpoena implicated the prior notice exclusion, which stated that coverage would not apply to any claim “based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving . . . any facts, matters, events, suits or demands notified or reported to, or in accordance with, any policy of insurance or policy or program of self-insurance in effect prior to October 16, 2012,” because the matter had been noticed to the insured’s D&O insurer in 2011.
Later in 2013, the medical center notified its professional liability insurers of medical malpractice claims alleging unnecessary cardiac operations. The primary professional liability insurer agreed to defend the insured in connection with the claims subject to a reservation of rights, including a reservation that the prior notice exclusion was implicated by the 2011 notice to the insured’s D&O insurer. The professional liability insurers later filed a declaratory judgement action to determine their rights.
In the ensuing coverage litigation, the court rejected the insurers’ arguments that the prior notice exclusion barred coverage. First, the court held that, because the 2011 subpoena did not constitute adequate notice of circumstance giving rise to a claim, it could not be precluded by the prior notice exclusion. Second, the court held that a latent ambiguity arose from the application of the prior notice exclusion that must be resolved in the medical center’s favor. Specifically, the court determined that, because the professional liability insurers had notice of the investigation before issuing their policies, they created an expectation of coverage by failing to inform the medical center prior to the inception of the policy that the prior notice exclusion specifically would apply to bar coverage for any claims related to the investigation. Finally, the court held that the subpoena was not an uninsurable known loss because it did not constitute notice of circumstances and therefore could not be a known liability. According to the court, the insurers lured the insured into believing it had coverage for any claims in the policy period because they failed to advise that the prior notice exclusion would bar coverage for claims related to the subpoena.