Providing insurers with timely notice of claims is probably the most basic of coverage issues. Think of proper notice as the “Go” box in the board game Monopoly – you can’t get around the board to secure boardwalk hotels or bags of money until you get past “Go.” Claims notice works the same way. A policyholder can obtain and pay for the best insurance policies available, whether General Liability, Property, Directors & Officers, Errors and Omissions, Crime, etc., but the insurer may deny a claim because the policyholder provided notice one month or even one week too late. Sometimes notice is late because of an oversight or neglect on the part of a policyholder, but more often than not, notice is late because of unsuspected traps, particularly those contained in claims made insurance policies. As a recent case illustrates, these traps can be difficult to navigate. Ashland Hospital Corp. v. RLI Ins. Co., Civil Action No.: 13-143-DLB-EBA (EDKY, Northern Div. March 17, 2015).
In Ashland, Ashland Hospital purchased a $15 million primary D&O liability policy from Darwin National Assurance Company and a $10 million excess D&O liability policy from RLI Insurance Corporation, covering the period October 1, 2010 to October 1, 2011. Both policies are claims-made, which obligated Ashland Hospital to provide notice of claim as soon as practicable but no later than 90 days following expiration of the policy. In addition, the excess policy issued by RLI required Ashland Hospital to provide notice no later than 30 days after: (i) it provides notice to the underlying policy (Darwin), (ii) the alteration or cancellation of the Darwin policy, and (iii) the exhaustion of Darwin’s policy limits.
The facts here are fairly straightforward. On July 25, 2011, the United States Department of Justice issued a subpoena to Ashland Hospital as part of a Health Insurance Portability and Accountability Act (HIPPA) investigation, seeking emails, medical records, insurance billings, medical malpractice claims, and employment contracts related to nine doctors associated with two cardiology groups. Ashland Hospital ultimately agreed to pay $40.9 million to resolve allegations that it billed federal health programs for heart procedures that patients did not medically need. Ashland Hospital notified the primary insurer (Darwin) of the HIPPA investigation on December 30, 2011, 89 days after the policy expired. Darwin accepted coverage and ultimately paid its full $15 million limit. However, Ashland Hospital did not give RLI notice of the HIPPA investigation until June 29, 2012. Two years later, in 2014, Ashland Hospital notified RLI that Darwin had exhausted its underlying limits one week earlier. RLI denied coverage for late notice because Ashland failed to give RLI notice within 30 days of giving notice to Darwin and within the policy period.
Ashland Hospital filed suit against RLI, asserting claims for breach of contract and bad faith. Ashland Hospital contended that it complied with RLI’s notice provision because it timely notified RLI that Darwin’s underlying limits were exhausted and, even if its notice was late, RLI was not prejudiced because the claim had been covered by Darwin up until that point. The federal district court rejected these arguments, holding that (i) Ashland Hospital was required to comply with all of RLI’s 30-day notice requirements, not just one of them, and (ii) under Kentucky law, notice is a condition precedent in claims-made policies, and thus, an insurer need not be prejudiced by late notice to disclaim coverage.
Here is the sad reality of this case — a policyholder hospital forfeited $10 million in excess limits because of its failure to read or properly understand the separate notice requirements set forth in the excess policy. Likewise, it appears that the hospital or its counsel may have been confused, at least initially, as to whether the initial HIPPA-related DOJ subpoenas were even a “claim” as defined in the policies because those subpoenas were directed at two unaffiliated cardiology groups and a group of doctors, not Ashland Hospital. It was these mistakes, or some combination of them, that ultimately led to Ashland Hospital nearly blowing its notice obligation under the primary policy (one day remaining on the 90-day grace period) and completely blowing its 30-day notice obligations under the excess policies. These mistakes cost the hospital $10 million, a payment which the excess insurer would have undisputedly paid if the hospital understood its notice obligations under its entire D&O insurance program.
In Ashland, an excess insurer escaped liability based on a policy technicality. If competent coverage counsel was retained at the beginning of the HIPPA investigation and had a chance to review the subpoenas and the hospital’s D&O policies, Ashland Hospital would have received an additional $10 million in insurance money.
Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage. Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results. Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series. For additional information about this post, please email or call Brian Friel (FrielB@MillerFriel.com, 202-760-3162).