Untimely Claims Preclude Attempt to Arbitrate Coverage Dispute
The Court of Appeals of Indiana, applying Indiana law, has held that an arbitration provision in the insured company’s business owners’ policies was inapplicable because the claims at issue were not brought until after the coverage period had expired. Illinois Cas. Co. v. B&S of Fort Wayne Inc., 201 N.E.3d 690 (Ind. Ct. App. Jan. 11, 2023).
The insured company owns two Indiana-based nightclubs. In October 2020, several professional models sued the company for allegedly using their photographs in advertisements and posting those advertisements on the clubs’ social media accounts without the models’ permission. The alleged conduct occurred between 2014 and 2020. The company sought coverage for the suit under its business owners’ insurance policies, which included specified coverage for “personal and advertising injury.” The policies were in effect from November 2014 to August 2020. In 2016, the insurer added a claims-made cyber protection endorsement (the “Endorsement”) that limited the personal and advertising injury coverage and included an arbitration provision in the event of “any irreconcilable dispute” between the insurer and company.
In November 2020, the insurer denied coverage for the complaint. Several months later, the company settled with the models for nearly $2 million, and as part of the settlement, assigned its insurance rights to the models to recoup the majority of the settlement amount. The insurer filed a declaratory judgment action, arguing that it had no duty to defend or indemnify any party in connection with the suit and settlement. The models then filed a motion to compel arbitration under the Endorsement, which the trial court granted.
On appeal, the court ruled that the trial court erred by granting the models’ motion to compel arbitration. It held that “the arbitration agreement clearly and unambiguously does not apply to the parties’ dispute for two reasons.” First, it found that almost a third of the models alleged misconduct that occurred before the Endorsement (and thus, the arbitration provision) went into effect in 2016. Second, it highlighted that the Endorsement afforded coverage on a claims-made basis, which required a claim to be made against an insured during the coverage period. Here, the models filed their complaint in October 2020 – i.e., after the expiration of the company’s business owners’ policies. Accordingly, the court concluded that “[b]ecause the claims were not timely made under the . . . Endorsement, the arbitration provision does not apply, and the Models are not entitled to arbitration on their claims against [the insurer].”