Notice-Prejudice Rule Does Not Apply to Fidelity Bonds

In an unpublished decision applying Colorado law, a federal district court has held that an insurer does not need to establish prejudice in order to deny coverage under a fidelity bond on late notice grounds. In re Centrix Financial, 2015 WL 2259647 (N.D. Ill. May 11, 2015). The court also determined that notice to an insurer that was a subsidiary of the same parent company could not be construed as constructive notice and imputed to the other insurer absent evidence that the insured reasonably believed that notice to one insurer also constituted direct notice to the affiliate that issued the bond.

The insured’s trustee sought coverage under the insured’s fidelity bond for money that was reportedly fraudulently diverted from the insured by five of its former officers. The insurer denied coverage for the reported loss on the grounds that the insured failed to provide notice within 60 days of discovery of the alleged loss and that the insured discovered the loss before the inception of the bond based upon allegations in a prior third-party suit. The trustee filed an adversary complaint in the insured’s bankruptcy proceeding, and the parties filed motions for summary judgment. In connection with those motions, the insurer also filed motions in limine regarding certain evidentiary issues.

In granting the insurer’s motion in limine as to evidence regarding prejudice, or lack thereof, suffered by the insurer as a result of the insured’s late notice, the court determined that an insurer does not have to demonstrate prejudice in order to deny coverage under a fidelity bond on late notice grounds. The bond required notice to be provided “at the earliest practicable moment, not to exceed sixty days, after discovery of loss.” In reaching its conclusion, the court concluded that the fidelity bond and its notice requirement was “much closer in substance to [a] claims-made policy . . . than [an] occurrence policy,” and Colorado courts do not apply the notice-prejudice rule to claims-made policies. Therefore, according to the court, the insurer did not need to establish prejudice in connection with its denial of coverage on late notice grounds, and evidence regarding whether the insurer suffered prejudice was not relevant.

The court also excluded any evidence regarding the insured’s notice of the prior lawsuit to the bond insurer’s affiliate under a separate policy in an attempt to establish that the bond insurer had “constructive notice” of the loss. The court determined that the insured did not provide any evidence that it reasonably believed that notice to a different insurer constituted direct notice to the fidelity bond insurer, and the insured failed to show that the two insurers’ operations were sufficiently interrelated.

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