Insured’s Lack of Notice of Claims and Settlement Demand Bars Coverage

In a win for Wiley Rein’s client, the United States District Court for the District of New Jersey has held that, even though the insured provided notice of circumstances that might lead to a claim, an excess insurer properly denied coverage because the insured failed to notify the excess insurer of the actual claim and a subsequent settlement offer.  Kennedy Univ. Hosp. v. Darwin Nat’l Assurance Co., 2017 WL 1352208 (D.N.J. Apr. 7, 2017).  The court also held that the excess insurer was not barred by estoppel or waiver from denying coverage.

The insured, a health care organization, caused a patient to suffer second degree burns.  The insured reported the incident to its excess insurer in 2012.  In 2013, the patient later filed an action against third parties, which in turn asserted a claim against the insured health care organization. The patient also made a settlement demand to the insured and filed a malpractice suit against the insured in 2014.  However, the insured failed to provide any notice to the excess insurer of the lawsuits or the settlement demand.  The excess insurer only learned of the claims in 2015, after the primary insurer informed it of the lawsuits.  The excess carrier denied coverage on various grounds related to untimely notice. The insured filed a coverage action, arguing that the excess insurer had breached the policy by denying coverage.

The court held that, because the insured had failed to satisfy the policy’s notice and reporting conditions, the excess carrier had properly denied coverage for the claims.  The policy’s notice and reporting provisions expressly required that the insured provide prompt notice of any Claim or settlement demand, and also required the insured to submit quarterly reports that summarized all Claims and circumstances.  The court noted that the insured conceded that it failed to provide quarterly reports or notice of the settlement demand, as required by the policy to obtain coverage.

The court rejected the insured’s argument that such failures should be excused under the theories of estoppel or waiver.  The court explained that the excess insurer was not estopped from denying coverage because the insured had not suffered any prejudice.  In so holding, the court concluded that the excess insurer had initially informed the insured when it received notice of the circumstances that it would not be investigating the matter, and as such the insured had no justifiable expectation that the excess insurer would provide coverage.  The court further held that the excess insurer had not waived the right to deny coverage because the excess insurer’s lack of action did not constitute a voluntary and intentional relinquishment of any rights under the policy.

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