Kentucky Court Holds That Notice-Prejudice Rule Does Not Apply to Claims-Made-And-Reported Policies

In a matter of first impression, a Kentucky appellate court held that the notice-prejudice rule does not apply to claims-made-and-reported policies.  Darwin Nat’l Assurance Co. v. Kentucky State Univ., 2021 WL 1045716 (Ky. Ct. App. March 19, 2021).

Two former employees filed charges of discrimination against the insured university with the EEOC and the Kentucky Commission on Human Rights.  The university received notice of the employment discrimination charges against it on June 23, 2015.  The former employees later filed suit, and on October 2, 2015, the university noticed the matter to its insurer under a professional liability insurance policy.  The policy period ran from July 1, 2014 to July 1, 2015 and included a 90-day extended reporting period that ended on September 29, 2015.  It was undisputed that the insured provided notice three days after the end of the reporting period.  The insurer denied coverage, and coverage litigation ensued.  The trial court granted summary judgment in favor of the university, holding that the notice-prejudice rule applied.

On appeal, the university argued, as it had in the trial court, that the 90-day extended reporting period was ambiguous, but even if the extended reported period applied, that the insurer could not deny coverage because of the notice-prejudice rule.  The appellate court rejected both arguments and reversed.

First, the court held that the policy language was not ambiguous because it provided a certain reporting period and the procedure for how to notify the insurer of a claim.

Second, the court held that the notice-prejudice rule does not apply to claims-made-and-reported policies in Kentucky.  Because this was a matter of first impression, the court looked at public policy considerations and persuasive authority from other jurisdictions.  The court held that “applying the notice-prejudice rule to this Policy would undermine [the insurer’s] interest in negotiating liability policies with insureds.”  It further held that applying the notice-prejudice rule would “rewrite the Policy,” especially because the insured could have purchased a three-year extended reporting period (as opposed to the 90-day extended reporting period that it did purchase).  Finally, the court held that applying the notice-prejudice rule “would grant [the insured] coverage that it did not purchase.”