Tenth Circuit Finds Notice of Temporary Restraining Order Against Insured Did Not Constitute Proper Notice of Subsequent Lawsuit

The Tenth Circuit, applying Oklahoma law, has held that an insured’s notice of a temporary restraining order did not constitute sufficient notice of a subsequent lawsuit under a professional liability insurance policy.  Thames v. Evanston Ins. Co., 2016 WL 7228800 (10th Cir. Dec. 14, 2016).

The insured, a real estate company, was named as a defendant in a lawsuit arising out of the insured’s alleged misappropriation of client funds that were deposited in an escrow account.  Prior to the lawsuit, the claimant obtained a temporary restraining order (TRO) against the insured regarding the misappropriated funds.  The insured tendered the TRO to its insurer under a professional liability policy, and the insurer denied coverage.  The claimant then filed the lawsuit against the insured, but the insured did not provide any notice or documentation regarding the lawsuit to the insurer, including the petition, an amended petition, the claimant’s bankruptcy default judgment, or the insured’s acceptance of an offer to confess judgment.  The lawsuit proceeded and was resolved by the parties via confessed judgment without any involvement from the insurer.  The claimant then sought to collect the judgment from the insurer in a garnishment action, but the insurer argued that coverage did not exist because the insured had failed to provide proper notice of the lawsuit under the policy.  The trial court held in favor of the insurer, and the claimant appealed.

The appellate court affirmed, finding that notice of the TRO was inadequate to trigger coverage for the lawsuit under the policy.  The court relied on the policy’s notice provision, which required written notice of any claim made against the insured as a condition precedent to coverage.  The court further noted that the notice provision required the insured to “immediately forward to [the insurer] every demand, notice, summons or other process received.”  Placing particular emphasis on the word “every,” the court found that notice of the lawsuit was required by the policy, regardless of the prior notice regarding the TRO.  The appellate court concluded that the lack of notice prejudiced the insurer because the insurer was deprived of the opportunity to control the defense in the lawsuit and was not able to participate in the negotiations that led to the confessed judgment.