The United States District Court for the Central District of California, applying California law, has held that an insurer must show prejudice to deny coverage for untimely notice under a claims-made policy. Triyar Hosp. Mgmt. LLC v. QBE Specialty Ins. Co., 2023 WL 2372049 (C.D. Cal Jan. 17, 2023). The court also held that the policy was not a claims-made-and-reported policy because timely reporting was not an element of or necessary condition precedent to coverage.
In October 2014, the insured hospitality company filed a lawsuit against another party seeking enforcement of an agreement. The court found for the other party and, on February 21, 2017, entered an order directing the insured to pay the other party $2.17 million in fees and costs. In September 2019, the court amended the 2017 order to include the individual owners of the insured as judgment debtors. The individual owners paid the judgment, which totaled $3.39 million after adding accrued interest, and the insured entity indemnified the owners for their payment.
The insured first notified its insurer of the 2017 order and 2019 order on November 30, 2020, and sought coverage from the insurer for its indemnification payment to the owners. The insurer denied coverage on the basis that notice of the 2017 order was untimely for the September 15, 2016 to November 15, 2017 policy period and that the 2019 order constituted a "Related Claim" for which notice was also untimely. The insured brought a lawsuit asserting that (1) the 2017 and 2019 orders were not "Claims" under the policy; (2) even if the orders were "Claims," they were timely reported; and (3) the insurer must show prejudice to deny coverage if the Claims were not timely reported, and could not do so.
In the coverage litigation, the court first held that both the 2017 and 2019 orders were "written demand[s] for monetary or non-monetary relief against an Insured for a Wrongful Act" and therefore constituted "Claims" and "Related Claims" under the policy. The court also held that, because the 2017 and 2019 orders constituted a "Claim" first made against the insured during the 2016-2017 policy period, the insured's November 30, 2020 notice to the insurer was untimely. Finally, the court rejected the insurer's argument that the policy was a claims-made-and reported policy and, as such, the insurer need not show it was prejudiced in order to deny coverage based on the insured's late reporting of the Claim. The court explained that the policy's insuring agreement did not limit coverage to claims reported during the policy period and that the policy did not designate the reporting provision as an essential precondition to coverage. Accordingly, the policy properly was construed as a claims-made policy, under which the insurer was required to show that it had been prejudiced by the insured's late notice in order to deny coverage on that basis.
The court also pointed out that the insurer had maintained from the outset that it would have denied coverage for the 2017 order even had it been timely reported because the insured had initiated the underlying complaint. The court reasoned that the insurer could show prejudice by demonstrating that, had it received timely notice, notwithstanding a denial of coverage or reservation of rights, it would have settled the claim for less than the amount ultimately paid or taken steps that would have reduced or eliminated the insured's liability. Under that standard, the court held that the question of prejudice was one of fact that could not be resolved on summary judgment.
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