Claims made policies provide coverage for claims first made during the policy period, but only if the insurer is provided with timely notice of claim. Most claims made policies allow policyholders to provide insurers with a notice of circumstances that may give rise to a claim in the future, in order to make the date of the notice of circumstances as the claims made date for any future claims. A recent Sixth Circuit considered a situation in which a policyholder attempted to provide notice of circumstances, even though, the court later concluded, a claim had already been made. The appellate court concluded that because the policyholder’s notice omitted the circumstance the court considered to represent a claim, the attempted notice was insufficient to provide notice of the actual claim. The court’s decisions raises questions about policyholder’s notice obligations under the policy. The Sixth Circuit’s July 10, 2018 decision can be found here.
Background Regarding FHA Loan Investigation and Settlement
First Horizon National Corporation conducts banking business through a wholly-owned subsidiary, First Tennessee Bank, N.A. On April 27, 2012, the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Justice (DOJ) began investigating First Tennessee’s loan–origination services for Fair Housing Act (FHA) loans. The investigation began with an April 2012 HUD document subpoena. In June 2012, the DOJ issued a Civil Investigative Demand requesting interrogatory responses. Subsequent document requests and depositions followed
In May 2013, DOJ and HUD representatives met with First Horizon and its counsel regarding the FHA investigation. Among other things, the government’s presentation included a summary of preliminary findings that First Tennessee was in violation of the FCA and outlined theoretical damages in excess of $1.19 billion. The investigation continued thereafter. In February 2014, the DOJ and First Horizon entered a tolling agreement in which the DOJ agreed not to file a lawsuit against First Horizon on or before March 2014. The tolling agreement ultimately was extended several times.
On April 29, 2014, a DOJ representative communicated an oral offer to settle the ongoing investigation for payment of damages of $610 million. The offer was confirmed in writing by email. The email included a list of mortgages the government contended were deficient and that had been used as the basis to calculate the settlement offer.
In December 2014, First Horizon again met with representatives of DOJ and HUD, in which the government provided a detailed presentation about its investigation of mortgage deficiencies.
In early 2015, First Horizon made a series of settlement proposals. In June 2015, the parties reached a written settlement agreement in the amount of $212.5 million.
Background Regarding Insurance Issues
During the policy period August 1, 2013 through July 31, 2014, First Horizon maintained a program of E&O insurance consisting of a primary policy and seven excess policies.
On May 27, 2014 – that is, during the policy period and about a month after the April 29, 2014 $610 million settlement offer — First Horizon provided the insurers with what it described as a “notice of circumstances that may give rise to a claim” (NOC). Among other things, the NOC stated that since 2012, First Horizon had been “cooperating … in a civil investigation regarding compliance with [FHA] requirements.” The NOC stated that “discussions between the parties are continuing” and that “the investigation could lead to a demand or claim under the Federal False Claims Act.” The notice stated further First Horizon “is not able to predict the eventual outcome of this matter,” adding that the government had “established no liability for this matter,” and that First Horizon “is not able to estimate a range of reasonably possible loss.” The NOC did say that the aggregate value of the loans under investigation was over $8 billion. The NOC did not mention the $610 million settlement offer or the tolling agreement.
Following the ultimate settlement of the FHA matter, First Horizon sought indemnity from its insurers for the settlement amount. The insurers denied coverage for the settlement on a number of grounds. First Horizon filed an action seeking a judicial declaration that the settlement amount was covered. The parties filed cross-motions for summary judgment.
As discussed here, in a June 23, 2017 opinion, Western District of Tennessee Sheryl Lipman ruled that FHA’s April 2014 settlement offer represented a Claim within the meaning of the policy and that First Horizon’s May 2014 NOC was insufficient to provide notice of the claim that had already arisen.
After noting that the May 2014 notice did not refer to the $610 million settlement offer that the bank had received just a month earlier, Judge Lipman stated that “the general, boiler-plate language contained in the NOC was not sufficient notice.” She concluded that to permit First Horizon to rely on the May 2014 NOC as notice of the April 2014 Claim “defeats the policy behind a claim-made policy, where the purpose of the notice requirement is to inform the insurer of its exposure to coverage.” First Horizon appealed Judge Lipman’s ruling.
Relevant Policy Provisions
The primary policy defines the term “Claim” to mean: “(1) any written demand for monetary, non-monetary or injunctive relief; (2) any civil proceeding commenced by service of a complaint or similar pleading; (3) any arbitration, mediation or other similar dispute resolution proceeding; (4) any criminal proceeding commenced by return of an indictment; or (5)any administrative or regulatory proceeding commenced by the filings of a notice of charges, written request to interview, formal investigative order or similar document.”
With respect to notice issues, the Policy specifies that “the Insureds must give the Insurer written notice of any Claim as soon as practicable after the [Insured] becomes aware of such Claim, but in no event later than 90 days after the end of the Policy Period…”
Additionally, the Policy permits a “notice of circumstances” to be given to tie a future claim to the Policy, if during the policy period “the Insureds first become aware of any circumstances which may reasonably be expected to give rise to a Claim against the Insureds and if, before the end of the Policy Period … the Insureds give written notice to the Insurer of the circumstances and the reasons for anticipating such a Claim, with full particular…”
The July 10, 2018 Opinion
In a July 10, 2018 opinion designated not for publication, the Sixth Circuit, Judge Alice Batchelder, writing for a unanimous three-judge panel and applying Tennessee law, affirmed Judge Lipman’s ruling.
In seeking to have Judge Lipman’s ruling overturned, First Horizon had argued that the April 2014 settlement demand was not a “Claim” because it was not a “forceful statement coupled with a threat of consequences.” In rejecting this argument, the appellate court quoted with approval Judge Lipman’s statement that a communication can be a “demand” even if “phrased as a request where it is a request to do a particular thing specified under a claim of right,” that “may be couched in the customarily-used polite language of the day,” and that it “need not expressly demand payment if by implication its meaning is clear.” The appellate court agreed with Judge Lipman that the April 2014 settlement offer was a “Claim” within the meaning of the policy.
First Horizon also sought to argue that even if the April 2014 settlement offer is a “Claim” within the meaning of the policy that the May 2014 NOC was sufficient to provide the insurers with notice of Claim. In rejecting this argument, noting that the insurers “quite correctly and persuasively” asserted that the NOC was not sufficient to provide notice of claim because a reference to a potential demand or claim “conveys to any reasonable reader that no action demand or claim exists.” The appellate court said that the May 2014 NOC “far from being a notice of claim … emphasized the absence of any such claim, at least as of yet.”
Discussion
I have to admit that when I read the district court’s opinion last year, I viewed this case as just a cautionary tale about the need for policyholders to provide insurers with complete claims information. On review of the appellate court’s opinion and upon further reflection, I have some other concerns.
Let’s break this down. First Horizon’s E&O insurance was written on a Claims Made basis, meaning it applies to Claims that are first made during the policy period. Both the district court and the appellate court concluded that the April 2014 settlement offer was a Claim. For claims made date purposes, the 2014 settlement offer was a Claim first made during the policy period. Of course, under all claims made policies, in order for coverage to be triggered, the policyholder must also provide timely notice – in this case, during the policy period or 90 days thereafter.
It isn’t as if First Horizon didn’t provide the insurers with notice during the policy period. First Horizon did provide the insurers with notice, during the policy period. To be sure, the notice was described as a notice of circumstances that may give rise to a claim, but First Horizon did provide notice. Timely notice.
The problem here is that the policyholder thought its job was to tell the insurer about the investigation. The courts concluded that it was the policyholder’s job to tell the insurers about the settlement offer. There is a trap in the court’s logic; the trap comes from the legal conclusion that the settlement offer was the claim and therefore the failure to provide notice of the settlement offer constitutes a failure to provide notice of claim.
But let’s look at this from the policyholder’s perspective; what was going on was that the government was investigating potential wrongdoing at the bank involving the bank’s loans. In connection with the investigation, while there had been a number of developments, the bank wasn’t sure where it was all headed. What matters from the bank’s perspective is that there is an investigation, that the investigation was serious, and that the bank wasn’t sure where it could all lead. The bank didn’t know that the settlement offer was a “Claim” until the district court said it was a “Claim” later in the lawsuit.
It seems to me that that the courts, without saying so (at least not in so many words), felt that the policyholder was sandbagging the insurers by not telling them about the settlement offer. We can certainly wonder why the bank didn’t include information about the settlement offer in the May 2014 notice. We can speculate about possible motivations – for example, that the bank may have been worried about the potential impact of the government’s settlement offer on the bank’s future insurance premiums. However, that doesn’t seem quite right; after all, the bank did say in its May 2014 notice that the aggregate value of the loans under investigation was over $8 billion. If the bank was sandbagging the insurers, it certainly went about it a very peculiar way.
Isn’t the more plausible explanation of why the bank didn’t refer to the settlement offer is that the bank considered the point of its notice to be to tell the insurers about the existence of the investigation rather than all of the twists and turns that had occurred during the course of the investigation? Keep in mind, as far as the bank was concerned, it was not providing a notice of claim; it thought it was providing notice of circumstances that might in the future lead to a claim. The bank believed that a claim had not yet occurred but that the investigation could lead to a claim. The bank was just telling the insurers where the future claim might come from. From that perspective, the omission of the information about the settlement offer is less suspect, even if still inexplicable in hindsight.
Here’s the crux of the problem. Most policyholders think a claim is a lawsuit. Many policyholders don’t recognize that other circumstances not involving a lawsuit might represent a claim under the policy. The problem with all of this is that the policy’s notice of claim requirements can become a trap for the unwary. In more recent times, the definition of claim has been greatly expanded. For example, many policies now provide that a subpoena is a claim or that a request to toll the statute of limitation is a claim. These expanded provisions are generally viewed as favorable to policyholders. However, if First Horizon’s policy definition of Claim had included these recent expansions, the claims made date for the government investigation would have been even earlier in the investigative time line and the date by which notice of claim would have to have been provided would have been even earlier in the process.
My concern about the extent to which policyholders may not recognize a set of circumstances to be claim is one of the important reasons why I think insurers’ reliance on late notice should be subject to the notice prejudice rule. That is, insurers should not be able to assert late notice as a defense unless they were prejudiced by the late notice. I think there is a good argument here that the insurers were not prejudiced by the late notice. The insurers had the opportunity to participate in the subsequent proceedings, including the later settlement negotiations that ultimately resulted in the resolution of the case.
On appeal, the bank did try to argue that the insurers ought not to be able to rely on late notice in the absence of prejudice, but the appellate court said Tennessee is not a notice prejudice state and in any event the bank had waived the notice prejudice argument by failing to raise it in the court below.
The bank may not have been able to assert a notice prejudice argument here, but this case is a good illustration of why the notice prejudice rule is justified. Here, the policyholder was completely deprived of insurance coverage for which it paid even though it provided the insurers with a written notice of the circumstances involved with the claim and even though the insurers arguably suffered no detriment from the omitted information (after all, the bank did tell the insurers that the total value of the loans under investigation was over $8 billion dollars). I recognize that many states do not recognize the notice prejudice rule, which is all the more reason why I believe the policy form should be amended to specify that the insurer will not assert the late notice as a defense to coverage in the absence of prejudice caused by the late notice.
I have expressed my views about this case pretty vigorously, but in fairness, I recognize that some may argue that I have elided a few things. One of the big issues at the district court was the question of when the claim was made. The insurers argued the claim was first made earlier, before the policy incepted, and therefore that the claim was not made during the policy period. The policyholder argued that the claim was later but was deemed first made because of the supposed NOC. Because of these conflicting arguments, the district court had to first determine when the claim was first made, because that claims made date question is analytically prior to the question of whether the notice was sufficient – if the claim was not made during the policy period, you don’t even get to the notice issue.
Once having determined when the claim was made, the court then turned to the question of the timeliness of notice. So by the time the court got to the notice issue, it had already concluded that the claim had taken place before the bank submitted the NOC. Those who find my take on this case objectionable can certainly hang their hats on that, if they find that persuasive.
All of that said, this case presents all of the considerations underlie one of my most basic rules of thumb, which is that policyholders should always give notice, as soon as possible and with as much information as possible. The fact is that insurers are always going to try to challenge the sufficiency of the notice. Policyholders should do everything they can to avoid providing the insurers with an opening to challenge the notice. I think the courts’ conclusion here that the policyholder should have told the insurers about the settlement offer is 20-20 hindsight. But regardless of what you may think of the courts’ decision, the unmistakable lesson is the get your notices to the insurer as soon as possible and with as much information as possible.
I recognize that others, particularly those from the insurer side of the aisle, may have a very different view of this case and of the courts’ decisions. I encourage readers to add their views to this post using the blog’s comment feature, below.