No Notice-Prejudice Exception Applies to Financial Institution Bonds under Oklahoma Law

The United States District Court for the Northern District of Oklahoma has held, as a matter of first impression, that no notice-prejudice exception applies under Oklahoma law to a financial institution bond in the case of an untimely claim. Mabrey Bancorporation, Inc. v. Everest Nat. Ins. Co., 2022 WL 1410715 (N.D. Okla. May 4, 2022). The court reasoned that timely notice is a “condition precedent” to coverage that should not be excused under financial institution bonds because a bond is more akin to a claims made policy for which there is no notice-prejudice exception under Oklahoma law, and bonds are negotiated by sophisticated parties such that strict enforcement of the notice requirement is not unfair.

The insured, an owner of ATMs, was the victim of multiple fraudulent ATM transactions. The insured was notified of the fraudulent withdrawals and knew that it would be held liable for the transactions under a “liability shift” policy of a third-party bank that issued the cards to users of the ATMs. The insured tendered notice of the claim under a financial institution bond. The bond required notice no later than 60 days after “discovery” of loss, meaning when an executive “first becomes aware of facts which would cause a reasonable person to assume that a loss of a type covered by the bond has been or will be incurred.” The insurer denied coverage on the basis that notice was untimely, among other reasons, resulting in coverage litigation.

The court held that notice was untimely under the bond. The court found that the insured reasonably became aware that it would be held liable for the unauthorized transactions and that loss covered by the bond had been or would be incurred, but did not tender notice within 60 days of discovery.

The court considered whether the untimely notice might be excused under Oklahoma law under the “notice-prejudice exception,” an issue of first impression under Oklahoma law as applied to a financial institution bond, but held that the exception does not apply. First, the court explained that courts have taken exception to strict enforcement of notice provisions when a policy protects members of the public, such as an automobile liability policy.  According to the court, a bond does not indemnify an insured for damages to the public. For example, coverage requires that loss be “directly” suffered by the insured and not a third party. Second, the court reasoned that a financial institution bond is “functionally analogous to a claims made policy” because both types of policies provide coverage for events discovered within the period defined by the policy, and Oklahoma courts have expressly rejected a notice-prejudice exception for claims made policies. The court held, “like with claims made policies, application of the notice-prejudice exception to financial institution bonds such as the Policy would create an unbargained for expansion of coverage.” Third, financial institution bonds are not contracts of adhesion. According to the court, “any interest in mitigating harsh enforcement of contract terms against a party unable to negotiate is not implicated in their enforcement.”

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