In George K. Baum & Co. v. Twin City Fire Insurance Co., No. 12-3982 (8th Cir. July 16, 2014), the Eighth U.S. Circuit Court of Appeals ruled that the “as soon as practicable” notice language in a claims made professional services policy was ambiguous, rejecting the insurer’s late notice defense.
The insured, a municipal bonds dealer, secured professional services insurance from Twin City for a policy period from 2003 to 2004. In 2003, the Internal Revenue Service opened an investigation based on the insured’s faulty representation that interest on the municipal bonds was tax exempt. The insured notified its insurer of actual claims by the IRS and future potential claims by the insured’s municipal clients. The insurer treated the IRS investigation as a claim under the policy and the insured ultimately settled with the IRS for $7.7 million without admitting misconduct. In 2008, two years after settling with the IRS, various municipalities filed derivative suits against the insured, which were consolidated into an MDL in Southern District of New York. The insured did not notify Twin City of the litigation until 2010, another two years later.
The insurer initially denied coverage on the basis that the derivatives claims were not claims made during the 2003-2004 policy period, but it later withdrew its position because the claims related back to the timely-reported IRS investigation. The insurer also denied coverage based on late notice, arguing that under New York law, it did not have to prove prejudice.
The U.S. District Court for the Western District of Missouri ruled that Missouri law applied and that the insurer could not prove the prejudice required to deny coverage based on late notice. The Eighth Circuit Court of Appeals affirmed rejection of the late notice defense, but on different grounds. The court first ruled that New York law applied because the policy was issued to the insured’s office in New York specifically to avoid paying Missouri’s surplus lines tax. Although the insurer was correct that it was not required to prove prejudice under New York law, the court found that the policy’s notice requirement was ambiguous.
The policy’s insuring agreement required notice “as soon as practicable, but in no event later than sixty (60) days after the POLICY EXPIRATION DATE” in 2004. The policy also provided that “all claims based upon, or arising out of, the same wrongful act or interrelated wrongful acts shall be considered a single claim for all purposes…which shall be deemed first made at the time the earliest of all such claims was first made.” Thus, the court concluded that the subsequent multi-district litigation “constitute[d] ‘a single claim for all purposes,’ including notice” that was provided in 2003. The court also found that the “as soon as practicable requirement” was ambiguous when considered in conjunction with the 60-day time limitation and the relation back language. Finally, the court rejected the insurer’s alternative argument that the insured’s interpretation would allow it “to wait weeks, months or even years” before providing notice. The court was unpersuaded by “the complaints of a poor draftsman” and it warned that it would not “rescue an insurer from its own drafting decisions.”
Baum reminds us that courts continue to construe notice provisions generously in the insured’s favor and encourages a vigilant approach both to drafting and to litigation strategy regarding how that drafting might be later perceived by a court.