No Coverage Available Where Insured Fails to Provide Notice of Potential Claim During First Policy Period and Knew About, But Failed to Disclose, Potential Claim Prior to Second Policy Period

The United States District Court for the District of Maryland has held that where notice of a potential claim is not reported during the first policy period and the insured knew about, but failed to disclose, the potential claim prior to the second policy period, coverage is precluded under both policies.  James River Ins. Co. v. Brick House Title, LLC, 2017 WL 5126154 (D. Md. Nov. 6, 2017).  Furthermore, because the insured’s failure to notify the insurer of a potential claim is not a breach of contract, the insurer is not required to show prejudice under Maryland’s notice-prejudice rule for claims-made-and-reported polices.

The insured, a real estate settlement company, failed to remit payment to the mortgage holder of one of its clients.  Subsequently, the client’s title insurance company forwarded a letter to the insured which “advis[ed] of a potential claim” relating to the mortgage.  The insured committed the error and received the letter regarding a “potential claim” during the 2014-2015 policy period.  During the 2015-2016 policy period, the insured provided notice of a potential claim to its insurer.  The client filed a lawsuit against the insured after the end of the 2014-2015 policy period.  The insurer sought a declaratory judgment that it did not have a duty to defend or indemnify the settlement company for the lawsuit under either the 2014 or 2015 policies.

The district court concluded that coverage was unavailable for the lawsuit.  First, the court found that coverage was unavailable under the 2014 Policy because the insured did not provide notice of a potential claim during the 2014-2015 policy period.  Because the claim was not made until after that policy expired, the insured’s failure to provide notice of a potential claim to bring the possible, future claim within the scope of the 2014 Policy was a “non-occurrence of a condition precedent to coverage” rather than a “breach of the policy.”  Therefore, the insurer was not required to show prejudice from untimely notice in order to deny coverage under the 2014-2015 Policy.  Second, although the insured provided notice of a potential claim during the 2015-2016 policy period, the 2015 Policy’s prior knowledge exclusion barred coverage because the insured knew about or reasonably should have foreseen the potential claim before the 2015-2016 policy period began.