(Article from Insurance Law Alert, June 2019)
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The Sixth Circuit ruled that four interrelated companies were not entitled to coverage under D&O policies because one company failed to timely report an underlying lawsuit and another made a material misrepresentation in the policy application. US HF Cellular Commc’ns, LLC v. Scottsdale Ins. Co., 2019 WL 2323802 (6th Cir. May 31, 2019).
Four companies with overlapping ownership and executives were sued for allegedly committing several business-related torts. The companies sought coverage from Scottsdale, which the insurer denied. An Ohio district court granted Scottsdale’s summary judgment motion, ruling that coverage under one policy was unavailable based on the insured’s failure to timely report the underlying lawsuit and that coverage under a second policy was barred because of a material representation in the application. The Sixth Circuit affirmed.
Scottsdale issued three consecutive one-year policies, with the first inception date of July 31, 2013. The policies provide that “[t]he Insureds shall, as a condition precedent to their rights to payment under this Coverage Section only, give Insurer written notice of any Claim as soon as practicable, but in no event later than sixty (60) days after the end of the Policy Period.” The companies were sued in June 2015, but did not report the lawsuit to Scottsdale until January 2016, six months after the July 2014-July 2015 policy period had ended.
The Sixth Circuit ruled that the delay breached the condition precedent notice provision. The court rejected the companies’ assertion that the consecutive policies created a continuous three-year period of coverage and that the parties intended each renewal to “simply extend the expiration date of the earlier policies.” Instead, the court explained that the reporting requirements for each policy are distinct, indicating that “coverage under each policy is discrete and not continuous.”
In addition, the court ruled that coverage under a second policy was barred because of a material misrepresentation in the application. The company answered “no” to a question concerning prior litigation, notwithstanding the existence of pending claims against it. The court held that the application question was unambiguous, the information asked was material and to the extent that a “nexus between that misrepresentation and the Claim” was required, such a nexus was established, given that the misrepresentation related to the very litigation for which the company later sought coverage.