Declaratory Judgment Complaint Constitutes a Reportable Claim for a Wrongful Act; Subsequent Amended Complaint Adding Insured Defendants Not a Separate Claim

The United States District Court for the Northern District of Illinois, applying Illinois law, has held that there is no coverage under a D&O policy where the insured did not timely report a declaratory judgment lawsuit and instead sought coverage only after an amended complaint was filed in the successive policy period.  Hanover Ins. Co. v. R.W. Dunteman Co., 2020 WL 1275002 (N.D. Ill. Mar. 17, 2020).  The court held that the complaints were part of a single “claim” and not separate “claims” even though the amended complaint added insured defendants and theories of liability.

The insured company purchased a claims-made D&O policy for the period of March 31, 2017 to March 31, 2018.  It renewed for the period of March 31, 2018 to March 31, 2019.  On August 28, 2017, a declaratory judgment action was filed against the insured company.  The insured did not notify its insurer until July 13, 2018, when it received a second amended complaint (SAC) with new allegations and naming additional insured defendants.  The insurer denied coverage because the insured failed to provide notice within 90 days of the expiration of the 2017-2018 policy.

In the ensuing coverage litigation, the court ruled for the insurer.  The court first rejected the policyholder’s argument that the original complaint did not constitute a covered “Claim” for “Wrongful Acts” because it sought only a declaratory judgment.  The court held that, regardless whether the relief sought was declaratory in nature, the original complaint alleged that the insured company engaged in wrongdoing and thus qualified as a “Claim” for “Wrongful Acts.”

The court further held that the SAC was not a separate “Claim” first made during the 2018-2019 policy period.  Noting that “Claim” was defined to include a “civil proceeding commenced by service of a complaint,” the court reasoned that a “civil proceeding can only be commenced once” and “a new Claim did not arise with the filing of the SAC.” Even if the SAC were a separate Claim, the court held that it would constitute a Related Claim first made when the initial complaint was filed.  The policy defined Related Claims to include “all Claims based upon, arising from or in any way related to the same facts, circumstances, situations, transactions, results, damages or events or the same series of facts[,] circumstances, situations, transactions, results, damage or events.”  The court held that the Related Claims language was broad enough to aggregate the complaints despite the addition of new allegations and new insured defendants.

Finally, the insured argued that its notice should not be deemed untimely because it had a good faith reason for not reporting the initial complaint, and the delay in reporting was not lengthy.  In disagreeing with the argument, the court highlighted the difference between occurrence and claims-made policies:  “[a] claims-made policy imposes a more rigid notice requirement, because it links coverage to the claim and notice rather than to the injury,” and “Illinois law is clear that the issue of prejudice is irrelevant in the context of a claims-made insurance policy.”