Due to Lack of Notice, E&O Carrier Has No Duty to Indemnify Insured Auto Insurer’s Settlement Payment Stemming from Bad Faith Claim

An Illinois federal court, applying Illinois law, has ruled that, due to lack of proper notice, an E&O insurer had no duty to indemnify its insured auto insurance company’s $7 million settlement payment stemming from a bad faith claim in an underlying auto accident lawsuit. Lexington Ins. Co. v. Horace Mann Ins. Co., 2016 WL 2977169 (N.D. Ill. May 13, 2016). In so holding, the court found that even if the insured auto insurer provided written notice of a potential Claim, it was still required to provide written notice once a Claim was actually made against it.

The insured auto insurance company had issued an auto policy implicated by a motorcycle accident. The claimant’s attorney sent a bad faith “set up” letter to the driver’s insurer, offering to settle the entire claim for the bodily injury limits of the insured’s insurance policy if the insurer tendered a check within 20 days of the letter. The insurer responded before the 20 days elapsed, acknowledging that it was willing to settle the case for the policy limit, but advised that it needed to review hospital records before settling. The insurer did not receive the medical records within the 20 days and therefore did not tender a settlement check. The claimant filed a lawsuit against the driver, which resulted in a $17 million jury award. While post-trial motions were pending, the motorcyclist’s lawyer emailed the auto insurance company’s attorney asserting bad faith and demanding the full $17 million from the auto insurer.

The auto insurance company had its own E&O policy. Under the E&O policy, the insured was required to provide written notice of both potential and actual Claims. The policy also provided that the auto insurance company could not enter into any settlement without written consent by the E&O insurer.

The auto insurance company provided notice of a potential claim to the E&O insurer a few weeks before the jury’s $17 million award, and the auto insurance company orally reported the bad faith demand by the claimant. The auto insurer and motorcyclist claimant later reached a settlement of $7 million, shortly after the E&O carrier denied coverage for late notice.

In the declaratory judgment action filed by the E&O insurer, the court first analyzed the contractual provisions relating to the definition of “Claim” and those defining “Notice.” The Policy defined “Claim” as either (1) a written demand for monetary damages or (2) a judicial, administrative, arbitration, or other alternative dispute proceeding, in which monetary damages are sought. The parties disputed when the motorcyclist’s Claim was first made against the auto insurance company. The court determined that the email asserting bad faith and demanding $17 million was a Claim that triggered a contractual duty for the auto insurance company to inform its E&O carrier about the Claim.

The court then determined that the auto insurance company did not provide timely notice of that Claim to its E&O carrier. According to the court, even if the auto insurance company previously gave written notice of a potential claim, the Policy required it to provide a second written notice once it knew that the potential claim had ripened into a Claim. Consequently, the court held that because the auto insurance company settled its case with the motorcyclist before it provided its E&O carrier with written, contractually compliant Notice, the E&O carrier has no duty to indemnify the auto insurance company.