Sixth Circuit Affirms That Notice-Prejudice Rule Does Not Apply to Claims-Made Policies

A federal appellate court, applying Kentucky law, has affirmed a lower court’s ruling that an excess carrier does not need to demonstrate prejudice in order to deny coverage for late notice under a claims-made policy. Ashland Hosp. Corp. v. RLI Ins. Co., 2016 WL 787774 (6th Cir. Feb. 29, 2016).

The insured, a hospital, sought coverage under its primary and excess D&O liability insurance policies in connection with the settlement of a Department of Justice investigation into allegations that the insured billed the government for unnecessary heart procedures. The policies provided coverage on a “claims-made” basis. The insured reported the matter to its primary insurer on the last day permitted under the terms of the primary policy, but it did not notify its excess insurer of the matter until more than six months later. The excess insurer denied coverage for the settlement based on the insured’s failure to fulfill the excess policy’s notice requirements, and the insured initiated coverage litigation.

In affirming the lower court’s ruling for the excess carrier, the appellate court predicted that the Supreme Court of Kentucky would not extend the notice-prejudice rule to a claims-made policy with an unambiguous notice requirement like the excess policy. The appellate court also declined to certify the question to the Supreme Court of Kentucky because the district court already had ruled.