Regular readers know that I frequently write about insurance coverage disputes in which insurers contend that coverage is precluded due to the policyholders’ alleged late provision of notice. All too often, the policyholders end up without coverage as a result of the late notice allegations. In an interesting (albeit confusingly written) decision, a Michigan intermediate appellate court upheld a trial court’s rejection of a professional liability insurer’s late notice argument, finding that in fact the policyholder had provided timely notice of the claim ultimately in dispute, and therefore that the insurer was not entitled to recoup amounts the insurer incurred in defending and settling an arbitration that had been filed against the policyholder. The ruling highlights the fact that notice timeliness disputes often are factually complicated and that careful consideration of the applicable facts can sometimes confirm that a policyholder did in fact comply with the notice requirements. The Michigan Court of Appeals (Oakland Circuit)’s February 26, 2019 opinion can be found here.
Background
In February 2006, Alix Partners entered a consulting agreement with Knightsbridge Capital pursuant to which Alix was to provide due diligence services in connection with Knightsbridge’s possible acquisition of Märklin, a German model train manufacturer. Alix concluded that with certain operational changes Märklin could produce increased earnings. In May 2006, based on the Alix due diligence report, Knightsbridge completed the acquisition of Märklin.
A few weeks after the deal closed, Alex entered into a separate agreement with the newly acquired Märklin, to provide management services to assist with the planned turnaround.
The Märklin turnaround did not go well. In a December 2007 meeting of Märklin’s advisory board, Märklin’s Chairman blamed Alix for the company’s operating loss and demanded that Alix return part of its management advisory fees to help improve Märklin’s bottom line. In letters dated March 7, 2008 and April 21, 2008, Märklin’s Chairman demanded that Alex return 50% of its consulting fees because Märklin’s earnings were far below projections. Alix rejected these demands.
Knightsbridge’s counsel separately sent Alix a written request that Alix provide Knightsbridge with the statements and figures on which Alix relied in its due diligence for Knightsbridge in connection with the Märklin transaction. Knightsbridge’s counsel sent a second demand for the documents on February 9, 2009. Alix provided the requested documents to Knightsbridge on March 3, 2009. On July 22, 2009, Knightbridge sent Alix a draft arbitration demand. The arbitration demand addressed Alix’s alleged breach of duties in preparing the due diligence for Knightsbridge. The demand did not address any alleged deficiencies in Alix’s performance of management consulting services for Märklin. On October 6, 2011, an arbitration panel awarded Knightsbridge €13.4 plus pre-judgment interest against Alix.
At times relevant to this dispute, Alix maintained a series of professional liability insurance policies with its insurer. The supposed policy dates of these policies as reported in the appellate decision are candidly confusing. For purposes of this discussion, suffice it to say that the final extended reporting period of the policy the appellate court called Policy 2 was August 30, 2009. Much of the dispute between Alix and its insurer turned on whether the claim was first made during the policy period of Policy 2 or during an earlier policy period, in which case, the insurer contended, Alix’s provision of notice was untimely.
The insurer defended the claim under a reservation of rights and paid the arbitration judgment when entered. The insurer subsequently filed an action seeking to recoup the defense and indemnity amounts it has paid, arguing that Alix’s provision of the notice of claim had been untimely. The insurer’s argument was based on its argument that Märklin should have notified the insurer of Märklin’s demand to Alix for return of fees paid. The insurer also sought either rescission or reformation of Policy 2 based on the argument that Policy 2 had been procured or its policy terms conditions negotiated without Alix having disclosed the existence of the fee dispute with Märklin.
Alix contended that it has timely notified the insurer of Knightsbridge’s arbitration claim relating to the due diligence services; that Märklin’s demands regarding the management services fees was separate from the Knightsbridge arbitration claim relating to the due diligence services; and that Alix had no duty to notify the insurer of the Märklin fee dispute because the policy precluded coverage for fee disputes.
Alix and the insurer filed cross-motions for summary judgment. The trial court granted summary judgment for Alix and denied the insurer’s summary judgment motion. The insurer appealed.
Each of the potentially applicable policies contained an exclusion precluding coverage for claims arising out of ”1. Your fees and charges, including over-charges, or cost over-runs …. 3. The return of compensation paid to you.”
The February 26, 2019 Opinion
In a unanimous per curiam unpublished February 26, 2019 opinion, a three-judge panel of the Michigan Court of Appeals (Oakland Circuit) affirmed the trial court’s ruling, holding that Alix’s provision of notice to the insurer of the Knightsbridge arbitration had been timely.
In affirming the trial court, the appellate court rejected the insurer’s argument that Alix should have notified the insurer of the Märklin fee dispute because, the insurer contended, the claims and demand of Märklin were the same as the claims of Knightsbridge. The appellate court concluded that Märklin’s various demands that Alix return a portion of its fees arose from Alix’s alleged mismanagement under the management services contract , and did not relate to Alix’s advice to Knightsbridge under the prior due diligence services contract. Knightsbridge’s arbitration demand and complaint related to issues specific to Alix’s separate agreement with Knightsbridge. Indeed, Knightsbridge’s arbitration complaint expressly stated that any purported breach of Alix’s breach of its contract with Märklin were not the subject of its claims against Märklin.
The appellate court also agreed with the trial court’s determination that Alix “had no responsibility to report the Märklin claims because of the exclusionary language of the contract regarding fee disputes.”
Finally, the appellate court rejected the insurer’s arguments for rescission or reformation of Policy 2, holding that the insurer had failed to establish that Alix has wrongfully failed to disclose the existence of the Märklin fee dispute during the placement of Policy 2. The appellate court agreed with the trial court that Alix was not required to have disclosed the Märklin fee dispute given that those claims were excluded from coverage. The court noted that the insurer “fails to provide an explanation as to why an uninsured claim need be reported and how a claim that [the insurer] would not be responsible to cover under the policy would materially change the risk for those claims it was contracted to cover.”
Discussion
This situation seems to be fairly complicated but I suspect strongly it is not nearly as complicated as the appellate opinion manages to make it. The opinion is poorly organized and there are several instances where the appellate court seems to have gotten the various participants’ names mixed up. For example, at one point (see page 5 of the opinion), the court says with respect to Knightsbridge’s arbitration claims that “Knightsbridge was suing Märklin for an investment gone bad.” This is clearly in error; Knightsbridge was suing Alix, not Märklin. Also, I literally have no idea what the court was trying to say in its description of the various policies’ policy periods.
While the appellate opinion is frankly kind of sloppy, its analysis of the key issues does seem to cohere. In particular, it does seem clear that Alix’s dispute with Märklin and its dispute with Knightsbridge each involved different parties, a different contract, different services, and different supposed deficiencies. In addition, the court’s conclusion that Alix had no duty to notify the insurer of a fee dispute that would not have been covered under the policy also seems sound.
The fact is that Alix notified the insurer of the arbitration claim shortly after receipt and before the end of the reporting period of the policy in force at the time Alix received the arbitration claim. It was diligent with respect to the claim that resulted in the loss.
The fight here was ultimately about whether or not the Märklin fee dispute and the Knightsbridge investment advisory services dispute were the same or were different. Given the sequence of events here and given the relation between Märklin and Knightsbridge I can certainly understand how the insurer might well have raised the notice question. And to its credit, the insurer paid Alix’s defense costs as incurred and paid the arbitration award when entered, and only then asserted what it believed to be a defense to coverage. The two really dispositive facts here were that the fee dispute and the due diligence dispute were separate matters, and the fee dispute wouldn’t have been covered even if Alix had provided notice to the insurer.
Coverage disputes over the timeliness of notice can and often do result it the policyholder’s loss of coverage. However, in this case, both the trial court and the appellate court found, in consideration of all of the circumstances, that the policyholder’s notice was timely and therefor that coverage under the policy was preserved.