No Coverage for $3.5 Million in Pre-Notice Defense Expenses Where Notice Was a Year Late

Applying Delaware law, a federal court in New York has held that where an insured waited more than a year to report a lawsuit to its insurer and during that period incurred more $3.5 million in legal fees, the insurer had no obligation to pay pre-tender defense costs, without regard to whether the insurer could show prejudice from the delay in notice.  Abrams v. RSUI Indem. Co., 2017 WL 3433108 (S.D.N.Y. Aug. 10, 2017).

In March 2015, an officer and director of the insured holding company was sued by an investor for breach of contract.  More than a year later, in April 2016, the insured sent a letter to its insurer notifying it of the lawsuit and seeking coverage under its $3 million D&O Policy for the defense expenses incurred since the lawsuit was filed, which totaled more than $3.5 million.

In addition to a policy provision requiring the insured to give the insurer notice of a claim made as soon as practicable but in no event later than thirty days after the policy’s expiration, the D&O Policy provided that “[n]o Insured may incur any Defenses Expenses . . . . without the Insurer’s prior written consent” and that notice was a “condition precedent to the Insurer’s obligation to pay[.]”

After the insurer refused to reimburse those defense costs, the insured sued alleging that the insurer breached the D&O Policy.  The parties cross-moved for summary judgment. The holding company argued that the insurer was liable for the pre-notice defense expenses because the D&O policy did not explicitly disclaim pre-notice defense expenses or even mention “voluntary” payments.  The insured also argued that the insurer should be required to show prejudice from the delay to support its declination.  The court rejected both arguments as without merit.  First, according to the court, the import of the policy’s explicit, repeated and unambiguous references to consent prior to coverage was that any expenses incurred by the insureds prior to providing notice would be voluntarily paid by the insured and thus properly disclaimed by the defendant. That the policy did not contain a no-voluntary-payments provision was of no moment.  Second, the court found that Delaware courts routinely enforced these provisions without issue and without requiring an insurer to show prejudice.  Accordingly, the court denied the insured’s motion for summary judgment and granted summary judgment in favor of the insurer.