Texas Court Holds Late Notice Bars Coverage

The United States District Court for the Northern District of Texas, applying Texas law, has held that an insured’s late notice of a claim bars coverage, rejecting arguments that (i) the initial complaint did not constitute a “claim” because it did not allege a “wrongful act;” (ii) notice to the broker was sufficient; and (iii) the issuance of a renewal policy on different terms triggered the automatic extended reporting period. Vela Wood PC v. Associated Indus. Ins. Co., 2020 WL 5440496 (N.D. Tex. Sept. 10, 2020).

A law firm was sued for breach of fiduciary duty, fraud, and negligence. The law firm reported the initial complaint to its retail insurance broker at the time, but neither the firm nor its broker provided notice to the firm’s insurer before the policy expired. After the claimant amended its complaint, the firm provided notice to its insurer, which denied coverage on late notice grounds. Thereafter, the firm filed a declaratory judgment action against the insurer.

On cross-motions for summary judgment, the court ruled in the insurer’s favor, holding that the original complaint constituted a “claim” for which the law firm had not provided timely notice, therefore precluding coverage. In so holding, the court rejected the firm’s argument that the original complaint did not constitute a “claim” because it did not sufficiently advise the firm of the alleged act, error or omission at issue, noting that the policy’s definition of “claim” did not contain a “facial plausibility” requirement akin to that imposed by Federal Rule of Civil Procedure 12(b)(6). The court also held that the insured did not satisfy its contractual notice obligations by reporting the original complaint to its broker because there was no evidence that the broker had authority to accept notice on behalf of the insurer. Finally, the court rejected the insured’s argument that, when it renewed its policy on different terms, the prior policy was effectively cancelled, thereby triggering the automatic extended reporting period.  The court concluded that, where both parties agree to a change in coverage, the renewal does not trigger the extended reporting period.

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