Insurers Need Not Prove Prejudice to Deny Coverage for Failure to Provide “Prompt Written Notice” Under a Claims-Made Policy
Kelsey Hunt, a Law Clerk at Wiley Rein LLP, authored this post. Edited by Jessica Gallinaro.
The United States Court of Appeals for the First Circuit, applying Massachusetts law, has held that an insurer does not need to prove that it was prejudiced by the insured’s untimely notice to deny coverage under a “claims-made” policy. Stormo v. State Nat’l Ins. Co., 2024 WL 4234670 (1st Cir. Sept. 19, 2024).
The insured, an attorney, represented his clients in a real estate transaction, but the sale fell through after he allegedly represented that his clients no longer wanted to sell the property to the buyer because they had received a higher offer on the property. Several lawsuits were then filed, including a malpractice lawsuit asserted by the clients against the insured. The insured, however, did not notify the insurer of the malpractice suit until over a year after the complaint was filed. The insurer denied coverage for the malpractice suit pursuant to its claims-made professional liability policy’s prior knowledge exclusion. The insurer further reserved the right to disclaim coverage pursuant to the policy’s notice provision, which required that the insured provide “prompt written notice” of a claim.
After judgment was entered against the insured in the malpractice suit, the clients obtained an assignment of rights and filed suit against the insurer for breach of contract and statutory bad faith. The trial court granted summary judgment in favor of the insurer on the statutory bad faith claim based on the prior knowledge exclusion. At trial, the jury found in favor of the clients on the breach of contract claim without differentiating between the duty to defend or the duty to indemnify. The insurer then moved for judgment as a matter of law, arguing that the policy did not afford coverage based on the insured’s breach of his reporting obligations. The trial court ultimately agreed and granted judgment as a matter of law in favor of the insurer. The clients appealed.
On appeal, the First Circuit upheld the trial court’s ruling and held that the insurer owed no duty to indemnify the insured due to his untimely notice. In so holding, the court rejected the clients’ argument that the insurer could not deny coverage pursuant to the notice provision without evidence that it had been prejudiced by the insured’s late notice. The court instead concluded that this “notice-prejudice” rule applies only to occurrence policies—not claims-made policies. The court was also unpersuaded by the clients’ argument that the notice-prejudice rule should apply because the policy’s “prompt written notice” language—which differed from the requirement in other claims-made policies that notice be provided “within the policy period”—should be construed similarly to notice provisions in occurrence-based policies with “as soon as practicable” language. The court reasoned that the language of the notice provision itself is not the variable that distinguishes the policies that require proof of prejudice from those that do not; rather, the distinction is based on the nature of the policy itself as an occurrence or claims-made policy, with the former subject to the notice-prejudice rule and the latter exempt from it.
The First Circuit concluded that there was no breach of the duty to defend because the clients had failed to raise any such argument with the trial court or on appeal and thus waived any objection to the dismissal of their contractual duty-to-defend claim.
The dissent argued that Massachusetts precedent had never decided whether a claims-made policy with an “as soon as practicable” notice requirement would be subject to the notice-prejudice rule and that, given the novel inquiry, the appropriate action was to certify the question to the Supreme Judicial Court of Massachusetts.
