The Eleventh Circuit Court of Appeals recently held that under a claims-made policy, an insurer had no obligation to indemnify a technology company for repeatedly undermining a licensing agreement with its business partners.

As covered in the October 2021 edition of Executive Liability Insights, the underlying suits arose after the technology company entered into a licensing agreement where it agreed to use the claimant’s patented code to manufacture and sell a jointly-developed product. The claimant later sued the technology company for violating the agreement, alleging the company used the code to develop its own competitive product, then failed to properly brand the new product as using the claimant’s technology or pay the claimant for its use. The parties settled the litigation, but the claimant sued the technology company a second time, alleging the company once again breached the terms of the licensing agreement as well as the settlement agreement by creating and marketing a new product with indistinguishable functions.

After settling the second litigation, the technology company sought coverage for the settlement from its insurer. The insurer, however, denied coverage on the grounds that the second lawsuit related back to the first suit and was therefore not a claim first made during the policy period under which it was noticed. Under the policy, coverage did not apply to loss “in connection with an act, if such act also correlates with any claim deemed to have been made before the beginning of the policy period.” The policy defined “act” to include “all correlated acts, errors or omissions and all series of continuous or repeated acts, errors or omissions.”

In finding in favor of the insurer, the Eleventh Circuit focused on the facts common to the two underlying lawsuits. Although the policy did not define “correlation,” the court explained that mere failure to provide a definition does not render a term ambiguous. After reviewing some dictionary definitions, the court determined that correlation does not necessarily imply causation. Instead, correlation takes “nothing more than a showing that acts and claims 'tend to vary, be associated, or occur together in a way not expected on the basis of chance alone.'” Because the insurer was able to establish that the technology company had displayed a pattern of repeated misconduct toward its business partners, the court determined that the second suit related back to the first and was thus excluded under the policy. 

An Oklahoma federal court recently held that an insurer must show prejudice to deny coverage for late notice under a claims-made policy where notice of a claim was untimely under the policy’s reporting window, yet within the policy period. 

A physician purchased a claims-made-and-reported professional liability insurance policy. The policy’s notice provision required that if a claim was made, the insured must “deliver to the Company within ten (10) days after the date of receipt of the claim or potential claim, every demand, notice, summons, notice of intent to sue, complaint” or “any document the insured or the insured’s representative receives relating to a claim.” The policy also contained a section entitled “What to do in case of a claim,” which instructed the insured to “immediately, however no later than within ten (10) days, report the details to either your agent/broker” or to the insurance company.  

Thereafter, the physician was sued by the administrator of a patient’s estate after the patient passed away. The physician notified his insurance broker of the lawsuit via telephone and provided a copy of the summons and complaint one week later with instructions to notify the insurer. The insurer received notice of the suit from the physician’s broker approximately six weeks after the physician first received notice of the suit, i.e., more than ten days after the claim was made but within the policy period. The insurer denied coverage and sought a declaration that is owed no duty under the policy. 

Although the court found that the suit met the definition of claim under the policy, it further found that the policy was ambiguous as to how the insured was supposed to provide notice. Regardless, the court concluded the insured failed to give timely notice because such notice fell outside of the ten-day notice window, and next sought to determine whether Oklahoma’s “notice-prejudice rule” was applicable to a claims-made-and-reported policy. Although the court noted that a showing of prejudice is not required to deny coverage under a typical claims-made policy, the court further noted that Oklahoma courts had not addressed claims-made policies with ten-day reporting windows. Furthermore, the court noted that other jurisdictions have held that an insurer must prove prejudice when an insured notifies it of a claim within the policy period but fails to provide notice within the time specified in the notice provision. Accordingly, the court determined that Oklahoma would similarly conclude that an insurer must show prejudice to deny coverage on a claims-made policy when notice was untimely under the reporting window but made within the policy period.