The Massachusetts federal court's decision in Lexington Ins. Co. v. United Health Group Inc., No. 09cv10504-NG, 2011 U.S. Dist. LEXIS 14929 (D. Mass. Feb. 15, 2011), reminds us that periodic loss runs may satisfy a policy's notice requirement if they are accurate and actually provided to the insurer. There, two weeks before settlement of an underlying action, reinsured United Health Group Incorporated ("United") sought $28 million in coverage from its reinsurer, Lexington Insurance Company ("Lexington"). Lexington denied the claim, alleging late notice and prejudice. United, however, pointed out that it had provided Lexington's affiliate with over forty loss run reports, in the form of Excel spreadsheets, which included a line item relating to the underlying claim (among thousands of other claims). Indeed, at least five reports showed that United's reserve for the underlying claim exceeded 50% of United's self-insured retention, but Lexington never inquired about the claim.
The court, applying Minnesota law, found that the reinsured had not substantially complied with the applicable notice provisions and that the reinsurer had been substantially prejudiced by its late notice. The court noted that certain loss runs listed "0" for reserve expenses at a time when United had millions in defense bills. The court did not accept United's explanation that such discrepancies resulted from a lag between payment and updating its claim reporting spreadsheets. The court expressed concern that during the two years before United's demand for payment, it had sent no claim reports to Lexington but instead had sent them to a Lexington affiliate with which United had an account. The court opined that whatever the reason, the last report actually sent to Lexington suggested that the claim had been paid in full and gave no indication that it would exceed the agreed-upon threshold and potentially implicate Lexington's coverage. The court noted the policy provision requiring loss reports be sent to Lexington's Boston claims department. The court therefore concluded that United's "lapse had extraordinary consequences to Lexington," including depriving Lexington of its right to associate until it was asked to foot the bill.
United Health serves as a reminder that periodic loss runs are an efficient means to communicate claims information to insurers and reinsurers, at least when they are accurate and forwarded as required by the policy. Moreover, policyholders should not take for granted that an intermediary or affiliate, despite promises to the contrary, will forward claims information to the correct department or corporate affiliate. When in doubt, check the policy and conform to the precise terms of the notice provisions.