Renewal Correspondence to Underwriter Fails to Satisfy Claims-Made-and-Reported Policy’s Notice Requirement 

Applying California law, the United States District Court for the Northern District of California has held that correspondence to an underwriter referencing a claim during the renewal process did not satisfy the notice requirement of a claims-made-and-reported excess policy. Heritage Bank of Commerce v. Zurich Am. Ins. Co., 2022 WL 3563784 (N.D. Cal. Aug. 17, 2022). The court also held that even had the insured complied with the notice provision, the insolvency exclusion would bar coverage.

The insured bank sought coverage for losses arising from lawsuits filed by victims of a Ponzi scheme facilitated by its bankrupt client and the bankruptcy trustee of that client. The victims sued the insured bank because they could not be fully compensated for their losses by the bankrupt client. The bank mentioned these lawsuits in correspondence to its excess insurer’s underwriting department during the 2018-2019 policy period but did not send any notice to the claims department until February 2021. The excess insurer denied coverage on the basis that the bank failed to meet the notice requirement and that the followed primary policy’s insolvency exclusion, which provides that the insurer “shall not be liable for Loss on account of any Claim arising from, or in consequence of . . . the insolvency of any . . . person or entity, or the inability of any such entity or person to make any payment,” barred coverage.

In the ensuing litigation, the bank argued that the excess policy was a claims-made policy, rather than a claims-made-and-reported policy, because the excess policy follows a claims-made primary policy. The court rejected that argument by noting the excess policy’s express claims-made-and-reported notice provisions. The court held that the bank’s correspondence to the underwriter regarding the lawsuits did not satisfy the notice requirement because insurers do not have a duty to investigate unless notice is sent as required.

In response to the bank’s argument that its communication to the underwriter constituted notice of a potential claim, the court held that notice of a potential claim likewise fails to satisfy the notice requirement for claims-made-and-reported policies. Finally, the court held that even had the bank complied with the notice provisions, the insolvency exclusion would apply to bar coverage because the insolvency of the bank’s client prompted the claimants to assert claims against the bank.