A Massachusetts federal court recently held that a party's lapse in reporting a multi-million dollar and complex lawsuit deprived an insurer of the right to associate and was prejudicial as a matter of law, precluding coverage. See, e.g., Lexington Ins. Co. v. United Health Group Inc., No. 09-cv-10504 (D. Mass. Feb. 15, 2011).

Lexington Insurance Company issued Managed Care Professional Liability Policy No. 647-7018 (the “Policy”) to United Health Group, which the court's opinion described as an insurance company. Under the Policy, United Health self-insured its claims up to $3 million per claim, with Lexington providing coverage for claims that exceeded that amount. The Policy contained a notice clause that stated, in pertinent part, as follows:

Notification of Claims

You [United Health] agree to notify us [Lexington] as soon as practicable of all incidents, claims or suits in which any claim you reserve at or in excess of 50% of your Self-Insured Retention for that claim. In addition, you agree to send us quarterly claim reports indicating date of loss, date reported to you, claimant’s name, description of claim and reserve amount.

The Policy further provided that Lexington had the right and opportunity to associate, at its own expense, in the defense or control of claims that would either exceed or appear reasonably likely to exceed the Policy’s $3 million retention.

In 2001, a lawsuit was brought against United and several of its affiliates and employees by Physicians Health Plan (the “PHP claim”). United reported the suit to Lexington as part of various “claim” or “loss run” reports – spreadsheets that contained thousands of other claims that implicated or potentially implicated the Lexington Policy. Evidence was submitted indicating that least forty-two such reports were provided to Lexington in which the PHP claim was listed, including five reports that showed that United’s reserve for that claim had reached or exceeded 50% of United’s retention under the Policy ($1.5 million). Many of these loss run reports, however, contained information that was inaccurate or incomplete at the time they were sent to Lexington. To that end, a loss run report sent to Lexington in May 2006 indicated that the PHP claim had been settled for roughly $1.7 million, when in fact that claim would not be resolved until nearly two years later and for a much greater amount.

From June 2006 to April 2008, United inadvertently stopped sending loss run reports to Lexington, instead sending those reports to Lexington’s affiliate. On April 22, 2008, United sent a letter to Lexington advising that it planned to settle the PHP claim for $8.5 million and had incurred $19.7 million in defense costs. The letter requested that Lexington reimburse United for costs in excess of its retention. Lexington alleged that that this was the first time it became aware of the PHP claim, that United’s notice was untimely, and that Lexington was prejudiced as a result of having lost out on the opportunity to associate in the underlying litigation.

The court analyzed the parties’ claims and defenses under Minnesota law, as required by a Service of Suit clause in the Policy. First, the court found that United’s inclusion of the PHP claim in various loss run reports was proper under the Policy’s notice clause, rejecting Lexington’s argument that claims that were reserved at 50% (or greater) of United’s retention had to be reported under a different mechanism. However, the court held that United’s May 2006 notification to Lexington, indicating that the PHP claim had settled for $1.7 million and the subsequent lapse in reporting constituted a “clear violation” of the Policy’s notice requirement and deprived Lexington of its right to associate in the underlying suit. Having lost this right, and given the facts of the PHP claim (a multi-million dollar claim and uniquely complex litigation), the court found that United’s notice failures prejudiced Lexington as a matter of law. Moreover, the court rejected United’s argument that Lexington was required to produce specific evidence illustrating that the outcome of the PHP litigation or settlement would have been different had it associated in the defense, characterizing this position as “absurd” and a standard that Lexington “could not possibly meet.”

We note that although the court described the parties' relationship as being one of reinsurance, the Policy at issue appears more akin to excess or primary insurance. Moreover, in reaching its holding, the court relied upon several Minnesota cases involving construction of notice clauses in insurance policies (it is a “notice-prejudice” state, meaning that a party’s breach of a notice clause, by itself, does not relieve an insurer or reinsurer of liability). However, the court also relied on a First Circuit decision finding that a reinsurer was prejudiced as a matter of law when its cedent failed to notify it of a claim that resulted in a $2.5 million jury verdict. Because the court characterized the relationship as one of reinsurance, and because there are not many published decisions concerning the standard for finding that a reinsurer has suffered prejudice by being deprived of the right to associate in an underlying claim, it is anticipated that Lexington will be cited in the reinsurance context in late notice cases.

Click here to review the court's decision.