Executive Excused by E&O Policy’s Innocent Insured Provision Following Company’s Failure to Comply with Notice and Reporting Requirements

In Maxum Indemnity Co. v. Colliers International - Atlanta, LLC, No. 20-11964, 2021 WL 2434350 (11th Cir. June 15, 2021), the US Court of Appeals for the Eleventh Circuit found that a professional liability policy afforded coverage to an “innocent” insured even when the principal insured failed to comply with the policy’s notice and reporting requirements, vacating a lower court ruling granting summary judgment in favor of the insurer.

Background

Maxum Indemnity Company issued a professional liability insurance policy to commercial real estate brokerage firm Colliers International, LLC. The policy was effective from January 1, 2015 to January 1, 2016 and had an extended reporting period from February 1, 2016 through February 1, 2017. The policy was issued on a “claims-made-and-reported” basis and included both a “Reporting Provision”—limiting coverage to claims first made and reported to the insurer during the policy period or extended reporting period—and a “Notice Provision”—instructing the insureds how to give notice of an incident to Maxum.

In March 2016, one of Colliers’s clients, Mattress Firm, sent Colliers a letter advising it of a potential lawsuit against Colliers and its Senior Vice President, Alexander Deitch. Colliers provided notice of Mattress Firm’s claim to Maxum several months later and, on October 30, 2017, Mattress Firm filed suit against Colliers and Deitch.

Maxum agreed to defend Colliers but reserved its rights to deny coverage. Maxum also noted that Deitch had not yet demanded coverage. After Mattress Firm filed suit, Deitch requested all insurance policies from Colliers. Colliers did not send Deitch the Maxum policy—only a policy issued by Liberty International. Deitch sought coverage from Liberty, which denied coverage. On March 2, 2018, Colliers provided a copy of the Maxum policy to Deitch, who promptly submitted a claim to Maxum. Maxum did not respond to Deitch’s request and instead filed a declaratory judgment action seeking a declaration that it had no duty to cover Deitch in the Mattress Firm litigation.

Maxum argued before the trial court that it did not have a duty to defend Colliers and Deitch in the Mattress Firm suit because Colliers violated the policy’s Reporting Provision by not reporting the claim in a timely manner. Deitch disagreed, arguing that Maxum improperly denied coverage due to the policy’s “Innocent Insured Provision,” which provided that:

Whenever coverage under this insurance would be excluded, suspended or lost . . . [b]ecause of noncompliance with any condition relating to the giving of notice to [Maxum] with respect to which any other “insured” shall be in default solely because of the failure to give such notice or concealment of such failure by one or more “insureds” responsible for the loss or damage otherwise insured hereunder[,] . . . such failure to give notice provided that if the condition be one with which such “insured” can comply, after receiving knowledge thereof, the “insured” entitled to the benefit of this Section shall comply with such condition promptly after obtaining knowledge of the failure of any other “insured” to comply therewith.

Deitch argued that the Innocent Insured Provision excused him from Colliers’s failure to report the claim because he was unaware of the existence of the Maxum policy and sought coverage as soon as he learned of the policy and Colliers’s failure to comply with the policy’s reporting requirements. The trial court disagreed, granting Maxum’s motion for summary judgment after finding that the Innocent Insured Provision only allowed coverage for an innocent insured when another insured breaches the notice requirements in the Notice Provision—not the reporting requirements in the Reporting Provision.

The Eleventh Circuit Opinion

Deitch appealed the decision and prevailed. He argued that the Innocent Insured Provision extended to cases like his where another insured failed to abide by the requirements in the Reporting Provision. The Eleventh Circuit agreed, vacating the trial court’s ruling in Maxum’s favor. The court first explained the distinction between claims-made and occurrence policies:

[T]he “essence” of a claims-made-and-reported policy is notice to the carrier within the policy period. A claims-made-and-reported policy is distinct from an occurrence policy. An occurrence policy is a policy in which the coverage is effective if the negligent act or omission occurs within the policy period, regardless of the date of discovery or the date the claim is made or asserted. The text of the policy here unambiguously indicates that it is a claims-made-and-reported policy.        

2021 WL 2434350, at *2. Notwithstanding the nature of Maxum’s claims-made-and-reported policy, the court recognized that the policy language would control and turned to the question of whether the Innocent Insured Provision was ambiguous under Georgia law.

Under Georgia law, the court recognized, an ambiguity arises when a policy is susceptible to more than one “logical and reasonable” interpretation. Id. at *3. Under this standard, the court asked whether it would be the “only logical and reasonable interpretation” to hold that the Innocent Insured Provision does not cover an insured when another insured violates the policy’s reporting requirements. The court found not only that Maxum’s view was not a reasonable interpretation but also that “the only reasonable interpretation of the Innocent Insured Provision is that it applies to instances where an innocent insured would lose coverage due to another insured’s failure to comply with the requirements surrounding the transfer of information about a claim, including the reporting requirements.” Id.

The court supported this interpretation with the ordinary meanings of the terms “notice” and “report,” which were undefined in the policy but the court found meant a transfer of information from one party to another. As used in the policy, the notice and reporting provisions provided instructions for the proper transfer of information about a claim to Maxum.

It did not matter whether the policy called that action “giving of notice” or “reporting,” and, as a result, the Innocent Insured Provision applied “whenever an innocent insured would lose coverage because of another insured’s failure to transfer information about a claim to Maxum.” Id. at *4. Because the insurer’s interpretation of the Innocent Insured Provision was unreasonable, the trial court had erred in holding that it applied “only in instances where another insured fails to comply with the notice requirements.” Id.

Takeaways

The Colliers decision highlights the fundamental differences between claims-made and occurrence based policies, particularly in reporting claims to the insurer, which can raise coverage issues beyond traditional “late notice” defenses that often arise under commercial general liability or other occurrence-based policies. Retaining experienced coverage counsel early to evaluate applicable notice and reporting requirements and taking prompt action upon receipt of claims can make the difference between triggering coverage and receiving a denial based on untimely reporting.

As Colliers shows, however, even the most diligent insureds may not be able to strictly adhere to a claims-made policy’s notice and reporting requirements. In the case of Deitch, the company appeared to have actively concealed the policy after previously giving notice of a claim on its own behalf, but other, less-nefarious situations can arise that leave individual insureds unable to report a claim to the relevant insurers. In those situations, it is critical to ensure that the company’s D&O, E&O, or similar claims-made policies have broad innocent insured and severability provisions, which not only protect innocent insureds against late-notice and reporting arguments but also mitigate the risk of those insureds losing coverage through imputation of another insured’s bad acts.

Conflicts can and do arise between a company and its current and former executives (or among executives), which may result in limited access to information and other hurdles preventing directors and officers from access the company’s insurance policies. Thus, it is important for individual insureds to understand the coverage protecting them in advance of a claim—both at the time of policy placement and at each renewal—so that they are knowledgeable about applicable coverage grants and are prepared to minimize the risk that conduct by other insureds will jeopardize the very coverage purchased to protect them.