Notice-Prejudice Rule Doesn't Apply to Claims-Made-and-Reported Policy

Facts of the Case

The insurance policy KSU purchased from Allied World was for the period from July 1, 2014, to July 1, 2015. The policy allowed claims made against KSU within the policy period to be reported to Allied World up to 90 days after the end of the policy period. The policy expired July 1, 2015, and the 90-day extended reporting period ended September 29, 2015.

During the policy period, two professors submitted notices of charges of discrimination to the US Equal Employment Opportunity Commission (EEOC) and Kentucky Commission on Human Rights (collectively, "EEOC Charges") related to their employment at KSU. KSU received written notice of the EEOC Charges on June 23, 2015. On September 2, 2015, the professors brought employment-related claims against KSU in Franklin Circuit Court; the substance of which would be covered under the policy. On October 2, 2015, 3 days after the extended reporting period expired, KSU notified Allied World, which denied coverage.

KSU eventually sued Allied World and both moved for summary judgment, and the circuit court granted summary judgment in favor of KSU.

The circuit court concluded that the notice-prejudice doctrine applied. However, the Kentucky Court of Appeals disagreed and held that the terms of the policy were clear about the extended reporting period. The court of appeals determined that the notice-prejudice rule did not apply to the policy in this case.

Analysis of the Case

The primary issue before the Supreme Court was whether the circuit court properly interpreted the notice provisions within the claims-made-and-reported insurance policy issued by Allied World to KSU and then, based upon that interpretation, correctly assessed the role, if any, that the notice-prejudice rule plays in this case.

Construction and Interpretation of Contracts

In the absence of ambiguity, a written instrument will be enforced strictly according to its terms, and a court will interpret the contract's terms by assigning language its ordinary meaning and without resort to extrinsic evidence.

The policy provisions that explain the insurer's coverage obligations in relation to the insured's reporting obligations and which present the notice requirements are found in three clauses, all of which require notice no later than 90 days after the end of the policy period. Furthermore, with regard to reporting beyond the policy period, the policy also provided KSU the right to purchase a discovery period after the expiration of the policy. KSU did not purchase discovery period coverage.

The Notice-Prejudice Rule

The policy expressly informed KSU that a condition of coverage—a condition precedent—was giving written notice of a claim as soon as practicable, but in no event was such notice of any claim to be provided to Allied World later than 90 days after the end of the policy period. Since KSU did not purchase discovery period coverage, the reporting period did not extend beyond the 90-day reporting period.

The policy clearly defined when the notice was due and the consequences if the notice was late. The policy unambiguously informed KSU that if the notice provisions were not met, Allied World had no obligation to KSU under the policy.

Unlike the circuit court, the Kentucky Supreme Court concluded that the policy provisions at issue were unambiguous. Given the plain terms of the contract, their full force and effect did not equate to creating a windfall for the insurer. In the absence of circumstances justifying relief, courts do not make contracts different from those that the parties make for themselves, even when forfeiture provisions are harsh.

Notice-Prejudice Rule and Claims-Made-and-Reported Policies

The Kentucky Supreme Court concluded:

A claims-made-and-reported policy provides coverage only for claims made against the insured and reported to the insurer during the life of the policy regardless of when the underlying incident occurred. Timely notice of a claim is the event that not only triggers coverage, but also defines its scope.

An occurrence-based policy is different. The Kentucky Supreme Court concluded that Allied World was entitled to deny coverage to KSU when KSU did not comply with the notice requirements.

Conclusion

The claims-made-and-reported liability insurance policy was designed to avoid long-term liability exposure faced by an "occurrence" policy and to avoid the insured's ability to extend reporting requirements by use of the notice-prejudice rule that allowed a late report as long as the insurer was not prejudiced by the delay. In this case, a 3-day delay would not cause prejudice to the insurer, but it breached the clear and unambiguous condition precedent to coverage. KSU had months to report the claim and waited too long.