No Coverage for Lawsuit After Policy Period that Does Not Arise from Notice of Circumstances

Applying Illinois law, the United States District Court for the Northern District of Illinois has held that no coverage was available under an E&O policy for a lawsuit first made after the policy expired because it did not arise out of a notice of circumstances provided during the policy period.  St. Paul Mercury Ins. Co. v. Hershare Fin. Corp., 2016 WL 3227311 (N.D. Ill. June 13, 2016). 

During the policy period of a claims-made policy, the insured financial institution provided a notice of circumstances to its insurer.  The notice of circumstances stated that, because the insured was subject to a consent decree and other regulatory controls, regulators, shareholders, or others might bring claims against the insured and were likely to allege “negligence, gross negligence, breach of fiduciary duty, and failure to act in good faith.”  After the expiration of the policy period, a creditor filed suit against the insured for allegedly concealing financial problems when selling subordinated debentures and for later defaulting on those debentures.  The bank sought coverage under the policy for that lawsuit based on its tender of the notice of circumstances during the policy period.  The policy provided that “any Claims subsequently arising from such circumstances shall be considered to have been made during the Policy Year . . . in which such circumstances and other information was first given to the Insurer.”  The insurer denied coverage for the lawsuit because it was not a claim first made during the policy period.

The court held that the lawsuit was not a claim first made during the policy period because it did not arise from the notice of circumstances provided by the insured during the policy period.  The court reasoned that the lawsuit did not arise out of the notice because the notice did not describe a potential lawsuit by claimants such as creditors, did not mention the potential for misrepresentation and breach of contract causes of action, and did not describe the potential wrongful acts that were alleged in the lawsuit.  The court rejected the argument that the insurer must provide coverage for “any claim brought by any party if that claim related to the bank’s financial instability.”  It concluded that such a broad interpretation of the notice of circumstances provision would defeat the purposes of a claims-made policy, which include allowing an insurer to easily identify risks, know in advance its claims exposure, and compute premiums with greater certainty.