In its recent decision in Lemons v. Mikocem, LLC, 2013 U.S. Dist. LEXIS 133976 (E.D. Mich. Sept. 19, 2013), the United States District Court for the Eastern District of Michigan had occasion to consider the issue of whether an insured’s notice of circumstances that could give rise to a claim was sufficient to preserve coverage for a future claim. 

Federal Insurance Company insured Indian Nation and its subsidiaries, including Mikocem, under a directors and officers policy with an employment practices liability coverage part.  Indian Nation and Mikocem operated funeral homes in Michigan and Tennessee.  The policy provided claims made and reported coverage for the period April 20, 2005 through April 20, 2006, but was extended through October 20, 2006.  Federal decided not to renew the policy upon its expiration.  On October 19, 2006, Federal received a letter from Indian Nation accusing Federal not to renewing the policy because of information it had learned in an Internet search; specifically, articles regarding Indian Nation’s alleged investment fraud.  The letter stated that:

Since [Federal] has chosen to non renew [sic] our account please let this serve as notice of an "incident" or "claim" to protect our rights under the policy. At this time no formal demands have been made against the company, however if there are any formal demands they will promptly be forwarded to [Federal] when they are received.

At issue in the Lemons case was coverage for a wrongful termination suit filed in April 2007 by John Lemons against Mikocem.  Lemons obtained a judgment against Mikocem and then sought to enforce that judgment, as a garnishee, against Federal.  On motion for summary judgment, Federal argued that it had no indemnity obligation with respect to Lemons’ judgment against Mikocem because Lemons’ suit was not a claim first made during the policy period.  Lemons argued in response that Indian Nation’s October 19, 2006 letter to Federal was sufficient notice under the policy’s reporting provision, which states:

If during the Policy Period, or any applicable Extended Reporting Period, an Insured becomes aware of a Potential Employment Claim or Potential Third Party Claim which could give rise to any Employment Claim or Third Party Claim (as such terms are defined in the Employment Practices Liability Coverage Section) or becomes aware of circumstances which could give rise to any Claim, other than an Employment Claim or a Third Party Claim (as such terms are defined in the Employment Practices Liability Coverage Section), and gives written notice of such Potential Employment Claim, Potential Third Party Claim or circumstances to the Company as soon as practicable thereafter but before the expiration or cancelation [sic] of this Policy, then any Claim subsequently arising from such Potential Employment Claim, Potential Third Party Claim  or circumstances shall be considered to have been made against the Insured during the Policy Year in which the Potential Employment Claim, Potential Third Party Claim or circumstances were first reported to the Company.

Notably, the policy defined “Potential Employment Claim” as a complaint or allegation of a wrongful act lodged with the insured’s human resources department or functional equivalent thereof. 

Lemons did not contend that Indian Nation’s letter of October 19, 2006 qualified as notice of a Potential Employment Claim.  He nevertheless contended that the policy’s reporting clause permitted notice of three different events: Potential Employment Claims, Potential Third Party Claims, or “circumstances which could give rise to any claim.”  He argued that circumstances reporting serves the purpose of “protect[ing] the insured when the insured is aware of facts (“circumstances”) and their potential affect [sic], but lacks enough detail to draw a legal conclusion as to a particular claim.”  In other words, Lemons argued that the notice provision allowed for reporting of specific types of potential claims (i.e., Potential Employment Claims and Potential Third Party Claims) but that the policy also had a “catch-all” reporting provision that allowed for generic reporting of circumstances that could result in any type of covered claim.

The court rejected Lemons’ reading of the notice provision since it ignored the clause immediately preceding the “notice of circumstances” language that expressly carved out Employment Claims and Third Party Claims (i.e., the clause stating “…other than an Employment Claim or a Third Party Claim.”)  This qualifying clause, explained the court, made clear that the policy only allowed reporting of circumstances for claims other than Employment Claims and Third Party Claims.  As such, concluded the court, notice of circumstances alone was insufficient to preserve coverage for employment claims first made subsequent to the policy’s expiration.  As such, and because the October 19th letter did not give sufficient details of a Potential Employment Claim, the court agreed that Lemons’ wrongful termination claim could not be considered one first made during the policy period for which coverage was available.