Following the basic notice requirements to provide timely and adequate notice of a claim contained in all insurance policies seems elemental to triggering an insurer’s duty to defend a policyholder. However, even sophisticated insureds can sometimes miss the simple notice provisions in their policies. This is why all insureds, no matter the level of their legal knowledge, need to pay close attention as to when and how to place their insurance companies on notice of a potential claim. If not, policyholders can easily lose out on significant coverage.
Harvard’s failure to meet this simple notice requirement lost the school $15 million of insurance coverage from its excess carrier for a claim stemming from a 2014 lawsuit filed against Harvard alleging unconstitutional admission policies. After the admission case was filed, Harvard tendered its defense to its primary insurer, AIG, with a policy limit of $25 million. Harvard additionally maintained an excess policy with Zurich with coverage of $15 million.
Once AIG’s $25 million policy limit was exhausted, only then did Harvard officially notify Zurich that Harvard was seeking continued coverage under Zurich’s excess policy. Unfortunately, this was, as Harvard admits, 17 months after the notice deadline pursuant to the terms of the policy. Zurich consequently denied coverage based on Harvard’s late notice and Harvard responded by filing suit.
Zurich initiated a dispositive summary judgment filing and on November 2, 2022, the United States District Court for the District of Massachusetts filed a four-page decision granting Zurich’s motion for summary judgment in the case of President and Fellows of Harvard College v. Zurich American Insurance Company. The Zurich policy was a “claims-made-and-reported policy,” which covered claims made during the policy period of November 1, 2014 to November 1, 2015. The policy contained a grace period where the notice of a claim could be given 90-days after the end of the policy period; neither of which were complied with by Harvard.
While all parties agreed that Harvard provided official notice to Zurich of the admissions lawsuit more than a year after the 90-day grace period, Harvard still argued that Zurich had constructive knowledge of the claim given the case’s high level of publicity. Therefore, formal notice was not necessary. Harvard also argued that since Zurich was not prejudiced by the lack of formal notice, it should not be allowed to skirt responsibility on a technicality.
In its holding, the Court emphasized that, under Massachusetts’ law, the unambiguous terms of an insurance policy must be strictly enforced and an insured’s failure to comply with the notice provision of a claims-made-and-reported policy bars coverage. As submitting a notice of claim is a condition precedent to coverage under an insurance policy, when a policyholder fails to comply with the notice provision, coverage may not be enforced.
Constructive Notice and Prejudice
Many jurisdictions have adopted rules requiring an insurer to be prejudiced by the insured’s late notice in order to deny coverage. These requirements are often referred to as “notice-prejudice rules.” Typically, constructive or verbal notice to the insurer will not be enough if the policy requires written notice. However, if the insurer is shown to have actual or constructive knowledge of a claim, a policyholder can argue that the insurer is precluded from denying coverage because it has not been prejudiced by the insured’s failure to provide timely notice.
Some jurisdictions have created “notice-prejudice rules” through legislation and others through court decisions. For example, Massachusetts establishes the rule through statute at Gen Laws ch. 175, § 112. The underlying theory of the “notice-prejudice rule” is that basic notice requirements in insurance contracts ensure that insurers have time to adequately investigate and defend a claim. However, if the insurer cannot establish that late notice prevented them from adequately investigating and defending a claim, it should not be permitted to deny coverage based solely on late notice.
Further, some jurisdictions vary as to which party, the insurer or the policyholder, bears the burden of proving prejudice or lack thereof. Various jurisdictions also make the distinction between claims-made policies and occurrence-based policies, including Massachusetts.
Notice Required by “Claims-Made-and-Reported” Policies
Under occurrence-based policies, the notice provision is usually worded as an “as soon as practicable” requirement. However, the notice requirement in a claims-made-and-reported policy is stricter. A claims-made-and-reported policy requires the claim to be reported during the term of the policy or within a short grace period following the expiration of the policy. This type of notice is always found in claims-made policies and is never found in occurrence policies. The difference is dictated by the type of policy.
While the “as soon as practicable” standard for occurrence policies permits an insurer to investigate the facts and occurrence related to liability, a claims-made policy is designed to minimize the time between the insured event and the payment. The closer in time the insured’s event and the insurer's payoff, the more likely the rates charged to the insured will fairly reflect the risks taken by the insurer.
This is why the Harvard court stated that there was no “wiggle room” to excuse an insured’s noncompliance with the notice provisions of a claims-made policy, and that it must be strictly construed.
The bottom line is that even sophisticated policyholders can make serious and costly mistakes if they don’t understand the nuances of their insurance policies. The lesson to be learned here is even if there is a slight risk, it’s always better to err on the side of caution and give notice to the insurance carrier rather than wait until it’s potentially too late.
For more information, please contact Leena Phaguda at LPhaguda@sdvlaw.com or 203.287.2155.