When Actual Knowledge Is Not Notice: Harvard Loses Excess Coverage For Defense Costs In Case Litigated All The Way To Supreme Court

Gunnar Larson g at xny.io
Wed Nov 23 19:07:54 PST 2022


Recently, amid the tempest of media coverage surrounding Supreme Court oral
arguments in the case of Students for Fair Admission v. President & Fellows
of Harvard College, another federal court quietly issued a dispositive
order in related coverage litigation, holding that Harvard's excess
carrier, Zurich, had no coverage obligation in the underlying case because
Harvard did not provide timely notice under a "claims-made-and-reported"
policy. The case is President and Fellows of Harvard College v. Zurich Am.
Ins. Co., 1:21-cv-11530-ADB (D. Mass.).

Harvard faced an uphill battle in the coverage suit: it did not report the
claim to Zurich within the policy's reporting period, and multiple
Massachusetts decisions have strictly construed similar notice requirements
in favor of insurance carriers. Harvard attempted to distinguish this line
of cases on the basis that, here, Zurich had actual notice of the
underlying litigation due to the case's public notoriety and widespread
media reporting. Actual notice would be dispositive, Harvard argued,
because the purpose of a claims-made notice requirement is to permit the
carrier to make informed underwriting decisions prospectively. But U.S.
District Judge Allison Burroughs disagreed, concluding that under extant
authority, "[p]rejudice and actual or constructive knowledge are not
exceptions to the general rule" that notice provisions in claims-made
policies should be strictly enforced. Importantly, in other contexts,
courts in many jurisdictions have rejected insurers' late notice defenses
when the insurer could not demonstrate that it was prejudiced by the timing
of notice and/or when notice was not a condition precedent to coverage
under the relevant policy language.

Harvard's failure to give earlier notice may have resulted from an overly
optimistic initial prediction of Harvard's likely legal spend in the
matter. According to the parties' filings, when the underlying suit was
filed in November 2014, Harvard had a $2.5 million self-insured retention
and a $25 million primary policy through AIG. Harvard timely tendered its
defense to AIG but said nothing to Zurich at the time-perhaps because it
did not think the claim would pierce the $27.5M layer. Although Harvard
finally provided notice to Zurich in May 2017, by then it was too late: the
claims-made policy required notice during the policy period or within 90
days of the expiration of the policy, a window that expired in January
2016, more than a year earlier.

To state the obvious-this decision provides a cautionary tale to all
policyholders, especially those holding claims-made-and-reported policies.
Policyholders are often hesitant to report claims because they doubt that
the subject insurance will come into play and they do not want to risk a
premium increase by reporting a claim to a layer that is ultimately never
reached. But this is a classic example of being penny-wise and
pound-foolish. It may have been reasonable for Harvard to initially predict
that its defense costs in the underlying case would remain within its
primary limits, but by the time Harvard filed its complaint against Zurich
in September 2021, Harvard reported that its $25 million primary policy had
been exhausted-and this was before Supreme Court briefing and oral
argument. Harvard's omission to provide notice to Zurich may well have cost
it millions.

When in any doubt, policyholders should give notice early and often.
Pillsbury's insurance professionals are always on hand to assist with
navigating any challenges.
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