Specific Entity Exclusion Bars Coverage of Timely-Noticed Lawsuit

Applying New Jersey law, a federal district court has held that a specific entity exclusion in a claims-made policy barred coverage for a lawsuit filed against the excluded entity.  JP Morgan Chase Bank, N.A. v. Scottsdale Ins. Co., 2019 WL 959698 (D.N.J. Feb. 27, 2019).  The court also held that the insured complied with the policy’s notice provisions.

The insurer issued the policy to the insured title company and associated agency.  Shortly after the policy incepted, a bank sued the title company to recover losses resulting from an alleged criminal enterprise in which several individuals diverted funds provided by the bank, instead of applying them to refinance certain mortgages.  Thereafter, at the direction of a representative of the title company, the insurer issued an endorsement cancelling the policy as to the title company and excluding coverage for any Claim “alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequences of, or in any way involving” the title company.  Two months later, the policy was cancelled as to the associated agency as well.  Fifty-one days after the policy was cancelled entirely, the title company provided notice of and sought coverage for the underlying lawsuit, which the insurer denied.

In the ensuing coverage litigation, the bank sought to recover from the insurer under an assignment of rights it obtained from the settlement of the underlying lawsuit.  The court held that (1) the title company’s notice was timely, but (2) the specific entity exclusion barred coverage for the underlying lawsuit.

First, the policy contained a notice provision requiring “written notice of any Claim as soon as practicable, but in no event later than sixty (60) days after the expiration of the Policy Period.”  The insurer argued that the “as soon as practicable” language constituted an element independent from the 60-day deadline.  The court disagreed.  It instead held that the notice provision only required the title company to provide notice within 60 days of the policy’s expiration.  Thus, the title company’s notice of the underlying lawsuit 51 days after the policy was cancelled satisfied the notice requirement.

Second, the policy excluded coverage for claims “alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequences of, or in any way involving” the title company.  The bank urged the court to limit the exclusion to claims brought after it went into effect, “not prior claims made during [insurer]’s policy term.”  Because the underlying lawsuit was brought before the policy was cancelled as to the title company, the bank argued that barring coverage would conflict with the insured’s “reasonable expectations.”  The court clarified that the reasonable expectations of an insured may override the plain meaning of a policy only when “a literal application of the exclusion would also violate public policy.”  The court held that the plain language “unequivocally exclude[d] coverage” for the title company in the underlying lawsuit.  It then held that any equitable concerns did not apply here, to a “sophisticated” and “particularly knowledgeable” insured purchasing its insurance through “sophisticated brokers.”  Thus, the specific entity exclusion barred coverage for the title company in the underlying lawsuit.