(Article from Insurance Law Alert, March 2019)
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A California federal district court ruled that an insured was not entitled to coverage for a whistleblower action or Department of Justice (“DOJ”) subpoena under consecutive D&O policies because it failed to comply with a condition precedent notice requirement. PAMC, Ltd v. National Union Fire Ins. Co. of Pittsburgh, PA, 2019 WL 666726 (C.D. Cal. Feb. 12, 2019).
National Union issued several consecutive one-year D&O policies to PAMC. The policies require notice of a claim to be provided during the policy period or within ninety days after the policy period ends. Additionally, the policy limits coverage to claims “first made against the insureds during the policy period” and states that such notice is a “condition precedent” to coverage. Based on these provisions, National Union denied coverage for a whistleblower action and DOJ subpoena. National Union argued that the applicable policy was the one in effect from February 2015 through March 2016 because the subpoena was served in June 2015 and because PAMC allegedly learned of the whistleblower action in March 2016. National Union argued that PAMC’s notice in 2017 was therefore untimely. The court agreed and dismissed PAMC’s coverage action.
Emphasizing that notice provisions in claims-made-and-reported policies are strictly enforced under California law, the court rejected several arguments asserted by PAMC. First, as to PAMC’s argument that the policy “allow[ed] for the possibility” of coverage notwithstanding a failure to comply with the notice provisions because the Declarations page stated that coverage is “generally” limited to claims first made and reported during the policy period, the court explained that “use of the word ‘generally’ . . . does not negate the reporting requirements otherwise plainly and conspicuously included in the [P]olicy.”
Second, the court rejected PAMC’s contention that the consecutive policy periods should be treated as one continuous policy period. The court explained that successive policy renewals have “no relevance to Plaintiff’s reporting requirements under the 2015-2016 Policy.”
Third, the court rejected PAMC’s assertion that notice of the subpoena was timely because it was “not legally able” to disclose its existence until January 2017, when the DOJ indicated that its investigation was complete. The cover letter that accompanied the subpoena stated that “this Office requests that you not disclose the existence of or compliance with the subpoena . . . until the Office notifies you that the investigation has been completed.” The court held that the cover letter did not prohibit PAMC from disclosing the subpoena to third parties and that, in any event, PAMC could have requested permission to notify its insurer of the subpoena.
Finally, the court dismissed the contention that even if notice was untimely, it should be excused under the notice-prejudice rule, noting that “California courts have consistently declined to extend the notice-prejudice rule to claims-made policies” and that the factual record did not, in any event, present any equitable justification for excusing a violation of a condition precedent to coverage.