No Coverage Because of Late Notice and Undisclosed Prior Knowledge of Claim

Applying California law, the United States Court of Appeals for the Sixth Circuit has held that an insurer properly denied coverage under consecutive claims-made-and-reported policies based on the insured’s failure to provide timely notice of a claim and the insured’s failure to disclose the pending claim in its application for coverage.  US HF Cellular Commc’ns., LLC v. Scottsdale Ins. Co., 2019 WL 2323802 (6th Cir. May 31, 2019).

The insured had purchased four policies from the insurer, three of which had a notice period of sixty days following the end of the respective policy periods.  The insured later faced a lawsuit but did not report the claim to the insurer until over six months after the policy periods ended.  The insurer denied coverage on the basis of late notice.  In addition, when the insured applied for one of its policies, it responded “no” to a question asking if any future insured had been the subject of any litigation in the three years prior.  However, several of the future insureds had learned about a lawsuit against them just one month prior to applying for insurance.  When the policyholder sought coverage for the lawsuit, the insurer denied coverage on the grounds that the insured had made a material misrepresentation related to the litigation in its application for insurance.

In the coverage litigation that followed, the Sixth Circuit noted that the relevant policy was a claims-made-and-reported policy, not an occurrence policy, and that the policy language clearly made timely notice a condition precedent to coverage.  The court rejected the insured’s argument that the policy’s reporting period was extended because the insured had renewed its policy, stating that “absent agreement to the contrary, renewal of a policy does not extend a policy’s reporting period.”

With respect to the misrepresentation issue, the court relied on the explicit language of the policy to reach its decision.  It pointed out that the policy excluded coverage for claims that were in “any way” related to the misrepresentation, and that the lawsuit at issue directly related to the misrepresentation because the insureds knew they faced a lawsuit at the time they represented to the insurer that they had not faced any litigation in the three years prior to the application.  Furthermore, the court rejected the policyholder’s argument that the misrepresentation was not “material” because in light of the policy language explicitly stating that all statements made on the application were “material.”