Montana Federal Court Holds that Notice-Prejudice Rule Does Not Apply to Claims-Made Policy

A Montana federal court has held that the notice-prejudice rule is inapplicable to claims-made policies as a matter of Montana law. Hanover Ins. Grp. v. Aspen Am. Ins. Co., 2021 WL 3769324 (D. Mont. Aug. 23, 2021). The court held that no coverage was available under either of two claims-made policies for a claim that was made during the period of the first policy but reported during the period of the second.  

A claim was made against a lawyer for malpractice no later than February 2017.  The law firm provided notice of the subject claim in December 2019. The insured law firm held two claims-made professional liability policies affording specified coverage for the July 1, 2016 to July 1, 2017 and July 1, 2019 to July 1, 2020 policy periods. The 2016-2017 policy contained an extended reporting period that provided specified coverage for certain claims made and reported after July 1, 2017.  The law firm and the 2016-2017 insurer disputed the length of the reporting period under the extended reporting period.

In the ensuing coverage litigation, the court held that no coverage was available under either policy because the claim was not first made and reported during either policy period or during the first policy’s extended reporting period. As such, the court granted the insurers’ motions for summary judgment and held that they had no duty to defend or indemnify the law firm against the subject claim.  In so concluding, the court noted that while the claim was made during the 2016-2017 policy period, it was not noticed to the insurer until 2019—after the policy had expired, and before the effective date of the policy’s extended reporting period. The court rejected the insured’s argument that Montana law would require the applicable insurer to demonstrate “prejudice” in order to deny coverage. Although the Montana Supreme Court has not explicitly held that the notice-prejudice rule applies to claims-made policies, the court recognized that “[t]rends in Montana caselaw indicate that, contrary to [the insured’s] arguments, the Montana Supreme Court would not apply the notice-prejudice rule to claims-made policies.”

The court also held that no coverage was available under the 2019-2020 policy because, even though the claim was reported within the policy period, it was made prior to the inception of that policy.