Despite an insurer having actual constructive notice of a claim, a federal court has sided, in part, with a carrier in a coverage dispute, finding that employees of an insured entity failed to comply with the strict claims-made policy's reporting requirements requiring notice for each insured.

In the underlying matter, the insured, a fertility clinic (the “Clinic”), noticed a wrongful termination claim made by a former employee/physician to its Insurer. The following year, the former employee filed suit against the Clinic, several Clinic’s physicians (“Physicians”), and other physician entities (“uninsured entities”). The allegations included wrongful termination, whistleblower retaliation, a later added negligence claim against the Clinic, defamation, fraud, and breach of contract.

The Clinic tendered the lawsuit to the Insurer identifying only the Clinic as the insured seeking coverage, without mention of any of the named individuals. The Insurer agreed to provide a defense to the Clinic under a full reservation of rights. At arbitration, the former employee made a demand to settle for an amount exceeding the full policy limits that was set to expire the following day. The Clinic sought consent to settle from the Insurer contingent on the Insurer waiving its right to seek reimbursement of the settlement payment, while retaining its right to pursue coverage litigation with respect to defense costs. The Insurer refused to agree to the terms given the limited time constraints to consider the offer.

The suit ultimately settled and the Insurer filed coverage litigation seeking a declaration that: (1) they had no duty to defend or pay any claims expenses for the Physicians due to their failure to properly notice the matter; (2) they did not act in bad faith by declining to settle the demand as the time constraint was “arbitrary,” and “unreasonable”; (3) the Clinic and Physicians breached their cooperation duties which prejudiced the Insurer; and (4) the Physicians did not qualify as insured persons under the policy as they acted on behalf of uninsured entities.

The Clinic argued that their notice provided constructive notice of the claim for the Physicians, as the Physicians qualified as insured persons and the Insurer’s failure to accept the settlement offer overnight constituted bad faith. The court, agreed with the Insurer, finding that the Physicians failed to comply with the policy’s strict notice provisions and therefore were not entitled to coverage. The court reasoned that under the claims-made policy, each insured must provide notice and permitting constructive notice would “impermissibly rewrite the Policy and alter the coverage for which the parties bargained.” The notice sent on behalf of the Clinic alone was insufficient.

The court ruled that the Insurer did not act in bad faith by declining the settlement offer, noting the “overnight time limitation” did not present sufficient time to assess the offer.