On April 14, 2016, in the case of St. Paul Mercury Ins. Co. v. Am. Bank Holdings, Inc., 15-1559, 2016 WL 1459517, at *1 (4th Cir. Apr. 14, 2016), the Fourth Circuit held that notice to a registered agent started the clock for purposes of calculating timely notice under American Bank’s liability policy with St. Paul. The policyholder, American Bank Holdings, Inc., provided untimely notice after the registered agent forwarded the underlying lawsuit to American Bank’s CFO, who was no longer with the business. With no apparent back-up for the CFO, the underlying lawsuit remained untouched until the plaintiff obtained and sought to enforce a $98.5 million default judgment. When American Bank alerted St. Paul, the insurer denied coverage based on untimely notice under the policy’s provision that notice be given “as soon as practicable, but in no event later than: (a) sixty (60) days after expiration of the Policy Year in which the Claim was first made.” American Bank later spent approximately $1.8 million in attorneys’ fees and costs getting the default judgment vacated and the state-court lawsuit dismissed.

St. Paul sued for a declaration that it was entitled to deny coverage under the policy, and American Bank counterclaimed seeking coverage for the $1.8 million in defense costs. The district court granted summary judgment in favor of St. Paul, finding American Bank’s notice untimely and St. Paul prejudiced.

On appeal, American Bank argued that it provided timely notice when it notified the insurer within days of learning about the default judgment—that “constructive knowledge” through service on its registered agent did not start the clock “as soon as practicable” clock. American Bank also argued that it need only comply with one of two possible deadlines under the policy: “as soon as practicable” or “before the expiration of 60 days after the Policy Year in which the Claim was first made.” American Bank also argued that St. Paul failed to establish that St. Paul suffered actual prejudice.

The Court disagreed on all points. It found that, under Maryland agency law, American Bank was imputed with actual knowledge of the suit once its agent was served with the lawsuit. The Court also found that the policy provided one deadline: “as soon as practicable,” which could be no later than 60 days after the expiration of the policy year. Finally, while the Court recited the rule that an insurer must also demonstrate actual prejudice as a result of untimely notice before denying coverage, the Court determined that St. Paul suffered actual prejudice by being deprived of the opportunity to exercise its rights under the policy before the entry of default judgment or American Bank’s expenditure of $1.8 million.

The decision is a stark reminder to policyholders about the importance of having good, sufficiently redundant risk management procedures in place – especially when those procedures touch on something as important as notice. When a key risk management employee leaves – in this case, American Bank’s CFO – the responsibility for receiving claims and lawsuits should be transferred contemporaneous with the employee’s departure and the registered agent notified. Coverage counsel can help you identify holes like these in your risk management procedures.