Late Notice May Not Matter for Renewed Policy

Despite the insured's failure to provide notice of a claim during the claims-made policy period, coverage was still available, absent a showing of prejudice to the insurer, where the insured renewed the policy at issue and provided notice during the renewal policy period, a Delaware court recently held. A medical device company received a demand letter threatening a class action lawsuit during the initial policy period. The lawsuit also was filed during the policy period, but was not served on the insured until the renewal policy period, when the insured notified the insurer. The insurer balked when asked to provide a defense, arguing that the policyholder's late notice precluded coverage. Although the court agreed that the insured failed to comply strictly with the policy's notice requirements, the insurer was required to demonstrate prejudice in order to evade its coverage obligations on the basis of late notice, given the continuous nature of the parties' relationship due to the policy renewal, the court held. Importantly, this case serves as a reminder that certain circumstances may excuse late notice, and policyholders should aggressively assert circumstantial defenses to late notice where they exist.

Detailed discussion

Medical Depot, a manufacturer and distributor of medical devices, received a letter from a claimant, Tony Mezzadri, on June 18, 2013. The letter threatened to file a class action lawsuit if Medical Depot did not bring itself into compliance with California law, alleging the company misrepresented the quality of its full-body sling with claims such as "built to exacting standards" and "carefully inspected prior to shipment."

Mezzadri then filed a putative class action in California state court in March 2014, demanding injunctive and monetary relief. Although he failed to serve the lawsuit on Medical Depot, the company was aware of the action. The plaintiff then filed an amended complaint and served it on the company on September 2, 2014.

Medical Depot notified its directors and officers liability (D&O) insurer, RSUI Indemnity Company (RIC), of the lawsuit on September 9, 2014 and sought coverage for the action. But RIC denied coverage, arguing that Medical Depot failed to satisfy the notice requirements of the applicable policy. RIC provided D&O coverage to Medical Depot under two policies: the first from June 15, 2013 to June 15, 2014 (the policy) and the second from June 15, 2014 to June 15, 2015 (the renewal policy). Medical Depot failed to timely notify RIC of the demand letter, RIC argued, and the subsequent complaints related back to the demand letter. Thus, RIC argued, the complaints constituted a later, related claim for which notice was not timely.

Medical Depot responded to the denial with a declaratory action, and the parties filed cross motions for summary judgment.

Delaware Superior Court Judge Eric M. Davis began with the policy, which required written notice of claims "as soon as practicable after such Claim is first made, but in no event shall such notice be given later than thirty (30) days after either the expiration date or any earlier cancellation date of this policy." The policy also defined a "Claim" as "a written demand for monetary relief" or a "civil proceeding for monetary relief which is commenced by Service of a complaint or similar pleading."

Based on this definition, the demand letter was not a Claim, the court ruled. "The Demand Letter does demand that Medical Depot bring its operations into compliance with applicable state law," the judge wrote. "It also demands that Medical Depot stop marketing its products incorrectly. Mr. Mezzadri used the word demand four times in his Demand Letter. But, Mr. Mezzadri never demanded money."

Even though the letter suggested that one "appropriate remedy" could be a full refund of the sling's purchase price, shipping, and handling, Mezzadri did not state that payment be made, the court said, and the letter was clearly intended to satisfy California Civil Code Section 1782, which mandates a demand letter as a condition precedent to the filing of a civil suit.

"At most, the Court finds that the Demand Letter is a demand that constituted a fact or circumstance 'which may reasonably be expected to give rise to a Claim against' Medical Depot," Judge Davis said. "Such a 'fact or circumstance' does not implicate the notice deadline provisions of the Policy and, instead, deals with a situation where a 'Claim' made after the expiration date of the Policy and would relate back to a time during the Policy Period."

However, Mezzadri's initial complaint was clearly a Claim, the court said, even though it was not served on Medical Depot, because it was a written demand for monetary relief. Similarly, the amended complaint also satisfied the policy definition of a Claim.

While the policy was a claims-made policy, it also featured a New York Regulation 121 Disclosure Supplement, which contains provisions extending the relationship between the parties without a gap when a renewal occurs.

"The clear import of these two disclosures is that RIC agreed to extend coverage when there is a 'claims-made relationship' with Medical Depot," the court wrote. "The claims-made relationship between RIC and Medical Depot is June 15, 2013 through June 15, 2015. Accordingly, there should be no gap in coverage for Medical Depot between June 15, 2013 and June 15, 2015. Moreover, the … disclosure supplement provides that coverage exists if a Claim is made and reported to RIC by Medical Depot during the 'policy period, any subsequent renewal and any applicable discovery period.'"

With continuous coverage, the insurer could not rely on the timing of Medical Depot's notice to deny coverage, the court said. "Medical Depot did not provide RIC with notice of the written demand for monetary relief (the Initial Complaint) 'as soon as practicable' or within thirty (30) days—or even sixty (60) days—of the expiration date. But, Medical Depot did provide notice within 'any subsequent renewal.' As the Policy provides, RIC and Medical Depot are in a claims-made relationship, without gaps in coverage and Medical Depot did report Mr. Mezzadri's Claim during any 'subsequent renewal' of the Policy."

Emphasizing the principle that an insurance policy is to be read in accordance with the reasonable expectations of the insured, the court said the policy and renewal policy "clearly" create a two-year period of claims-made insurance coverage.

"Given the express language of the Policy and the fact that the Policy was renewed, Medical Depot has every right to expect that Claims made during the claims-made relationship will be covered," the judge said. "RIC's arguments about this particular Claim—discovered but not reported during the Policy period then reported during the Renewal Policy period but not covered under either—defeats Medical Depot's reasonable expectation that Medical Depot would have extended policy coverage if it renewed the Policy."

The court did find in "this factual scenario, RIC must demonstrate that it was prejudiced by the untimely notice." Because the parties had not briefed the issue of prejudice, the court declined to grant summary judgment to either side.

As for policy exclusions, Judge Davis held that the relation back exclusion did not apply to the initial complaint because the demand letter was not a Claim. He also rejected RIC's argument that the Mezzadri action related to four prior personal injury suits filed against Medical Depot after consumers were allegedly injured as a result of the full-body sling. "Mr. Mezzadri is seeking redress for buying the sling," the court said. "Mr. Mezzadri never claimed that the sling caused him physical harm. The [actions] are not fundamentally identical."

To read the decision in Medical Depot, Inc. v. RSUI Indemnity Company, click here.

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