Notice-Prejudice Rule Does not Apply to Claims Made and Reported Policy
The Kentucky Supreme Court was asked to determine if the
claims-made-and-reported management liability policy ("Policy") Allied
World Specialty Insurance Company ("Allied World"), issued to Kentucky
State University ("KSU") provided coverage because KSU did not comply
with the Policy's notice provisions. The trial court applied the notice
prejudice rule and the Court of Appeal reversed. in Kentucky State
University v. Darwin National Assurance Company N/K/A Allied World
Specialty Insurance Company, No. 2021-SC-0130-DG, Supreme Court of
Kentucky (June 15, 2023)
FACTS
The Policy KSU purchased from Allied World was for the period from July
1, 2014 to July 1, 2015. The Policy allows claims made against KSU
within the policy period to be reported to Allied World up to ninety
days after the end of the policy period. The Policy expired July 1,
2015, and the 90-day extended reporting period ended September 29, 2015.
During the policy period two professors submitted Notices of Charges of
Discrimination to the United States Equal Employment Opportunity
Commission ("EEOC") and Kentucky Commission on Human Rights
(collectively, "EEOC Charges") .
KSU eventually sued Allied World and both moved for summary judgment.
The circuit court granted summary judgment in favor of KSU.
The circuit court concluded that the notice-prejudice doctrine applied.
The Court of Appeals determined that the notice-prejudice rule does not
apply to the Policy in this case.
ANALYSIS
The primary issue before the Supreme Court was whether the circuit court
properly interpreted the notice provisions within the
claims-made-and-reported insurance policy issued by Allied World to KSU
and then, based upon that interpretation, correctly assessed the role,
if any, that the notice-prejudice rule plays in this case.
THE POLICY.
The Policy provisions which explain the insurer's coverage obligations
in relation to the insured's reporting obligations and which present the
notice requirements are found in three clauses all of which require
notice no later than ninety days after the end of the policy period.
Furthermore, with regard to reporting beyond the policy period, the
Policy also provided KSU the right to purchase a Discovery Period after
the expiration of the Policy. KSU did not purchase Discovery Period
coverage.
THE NOTICE-PREJUDICE RULE.
The Policy expressly informed KSU that a condition of coverage - a
condition precedent - was giving written notice of a claim as soon as
practicable, but in no event was such notice of any claim to be provided
to Allied World later than ninety days after the end of the Policy
period.
The Policy unambiguously informed KSU that if the notice provisions were
not met, Allied World had no obligation to KSU under the Policy.
Unlike the circuit court, the Supreme Court concluded that the Policy
provisions at issue are unambiguous.
The Supreme Court concluded: "A claims-made-and-reported policy provides
coverage only for claims made against the insured and reported to the
insurer during the life of the policy regardless of when the underlying
incident occurred. Timely notice of a claim is the event that not only
triggers coverage, but also defines its scope."
ZALMA OPINION
The claims made and reported liability insurance policy was designed to
avoid long-term liability exposure faced by an "occurrence" policy and
to avoid the insured's ability to extend reporting requirements by use
of the notice-prejudice rule that allowed a late report as long as the
insurer was not prejudiced by the delay. In this case a three day delay
would not cause prejudice to the insurer but breached the clear and
unambiguous condition precedent to coverage.