Failure to Give Timely Notice of Arbitration Bars Coverage, Even Where Insured Gave Timely Notice of Related Claim
The United States District Court for the Southern District of Texas, applying Texas law, has granted an employment practices liability insurer’s motion for summary judgment in a lawsuit alleging that it wrongfully denied coverage for an arbitration award, concluding that the insured failed to provide timely notice of the arbitration to its insurer. Stadium Motorcars, LLC v. Federal Ins. Co., 2019 WL 212111 (S.D. Tex. May 15, 2019).
In February 2016, the insured car dealerships hired an individual to manage their collision center. The employee was fired within a few months of starting his employment. He alleged that he was fired in retaliation for reporting that the dealerships were fraudulently billing auto insurers. The employee later sued the dealerships for breach of contract and wrongful termination. The dealerships timely notified the EPL insurer of the lawsuit in August 2016. Seven months later, the employee voluntarily dismissed his complaint and filed an arbitration claim against the dealerships, asserting the same causes of action. Although the dealerships notified their insurer of the nonsuit, they did not inform the insurer of the arbitration. The employee was awarded about $335,000 in damages in the arbitration proceeding. In March 2018, after the award issued, the dealerships sought coverage. The insurer denied coverage on the ground that the dealerships failed to give timely notice of the arbitration.
The dealerships argued that they had satisfied the policy’s reporting requirement by timely reporting the initial underlying lawsuit to the carrier. They reasoned that, because the lawsuit and arbitration were based on the same or related facts, they were therefore “Related Claims” deemed a “Single Claim” under the policy made when the lawsuit was filed. Although the insurer conceded that the lawsuit and arbitration were “Related Claims,” it pointed to the policy’s reporting provision that required “written notice of any Claim.” The court agreed with the insurer’s reading of the reporting provision, holding that the policy required written notice of “any Claim,” not just notice of the first of all subsequent “Related Claims.”
The court further concluded that the dealerships failed to provide timely notice of the arbitration. The claims-made-and-reported policy required the dealerships to give notice “as soon as practicable,” but in no event later than 90 days after the end of the policy period, or the extended reporting period, which expired one year after the end of the policy. The policy was in effect from January 19, 2016 to January 19, 2017. Because the dealerships did not notify the insurer of the arbitration until March 2018, two months after the expiration of the extended reporting period, the court found that they did not provide timely notice.
As a result, the court held that the insurer was entitled to decline coverage. The court further explained that, because the policy was written on a claims-made-and-reported basis, the insurer was not required to show that it was prejudiced by the insured’s late reporting in order to disclaim coverage. Even if a showing of prejudice was required, however, the court concluded that the carrier could in fact establish prejudice because “one of the recognized purposes of a claims-made policy ha[d] been impaired” where the insurer first learned about an adverse result after the arbitration had been completed.