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The Supreme Court of Kentucky was asked to determine whether Allied World Specialty Insurance Company (“Allied World”), issued to Kentucky State University (“KSU”), provided coverage because the management liability policy (“Policy”) as produced and reported. KSU did not follow the Policy’s notification provisions. The trial court applied the notice prejudice rule and the appellate court reversed and the case was removed to the Kentucky Supreme Court in Kentucky State University v. Darwin National Assurance Company N/K/A Allied World Specialty Insurance CompanyNo. 2021-SC-0130-DG, Supreme Court of Kentucky (June 15, 2023)
The insurance that KSU purchased from Allied World was valid for the period July 1, 2014 to July 1, 2015. The policy allows claims against KSU within the insurance period to be reported to Allied World up to ninety days after the end of the insurance period. The policy expired on July 1, 2015, and the 90-day extended reporting period ended on September 29, 2015.
During the policy period, two professors filed notices of discrimination charges with the United States Equal Employment Opportunity Commission (“EEOC”) and the Kentucky Commission on Human Rights (collectively, the “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 filed employment-related claims against KSU in Franklin Circuit Court, the content of which would be covered by the policy. On October 2, 2015, three days after the extended reporting period expired, KSU notified Allied World denying coverage.
KSU eventually sued Allied World and both moved for summary judgment. The district court gave judgment in favor of KSU.
The district court concluded that the notice-prejudice doctrine applied. The Court of Appeal disagreed and held that the terms of the policy are clear regarding the extended reporting period. The Court of Appeal determined that the notice-prejudice rule does not apply to the insurance in this case.
The primary issue before the Supreme Court was whether the circuit court correctly interpreted the notice provisions of the policy issued by Allied World to KSU and then, based on 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 terms of the contract by assigning the language its ordinary meaning and without recourse to extrinsic evidence
The insurance provisions that explain the insurer’s coverage obligation in relation to the insured’s reporting obligation and that present the termination requirements are found in three clauses, all of which require termination no later than ninety days after the end of the insurance period.
Furthermore, with respect to reporting after the policy period, the policy also gave KSU the right to purchase a discovery period after the policy expired. KSU did not purchase coverage for the Discovery Period.
THE NOTICE-PRJUDGEMENT RULE.
The policy expressly advised KSU that a condition of coverage – a condition precedent – provided written notice of a claim as soon as possible, but in no event would such notice of any claim be given to Allied World later than ninety days after the end of the policy period. Because KSU did not purchase coverage for the discovery period, so the reporting period did not extend beyond the 90-day reporting period, the policy clearly defined when termination would occur and the consequences if termination is delayed.
The policy unequivocally informed KSU that if the notification provisions were not met, Allied World had no obligation to KSU under the policy.
Unlike the circuit court, the Supreme Court concluded that the policy provisions in question are unambiguous. Given the simple terms of the contract, their full force and effect is not the same as creating an unexpected risk for the insurer. Absent circumstances justifying relief, courts do not make agreements different from those parties make for themselves, even when the forfeiture provisions are harsh.
Application of the notice-prejudice rule to policies for claims made and reported.
The Supreme Court concluded: “A policy made and reported provides coverage only for claims made against the insured and reported to the insurer during the term of the policy regardless of when the underlying incident occurred. Early notification of a claim is the event that not only triggers coverage, but also defines its scope.”
An event-based policy is different. The Supreme Court concluded that Allied World had the right to deny KSU coverage when KSU failed to comply with the notice requirements.
The claims made and reported liability insurance policy was designed to avoid the long-term liability exposure incurred by an “occurrence” policy and to avoid the insured’s ability to extend the reporting requirements by using the notice-prejudice rule that allowed a late report as long as the insurer was not harmed by the delay. In this case, a three-day delay would not cause harm to the insurer, but it did violate the clear and unambiguous condition of coverage. KSU had months to file the claim and waited too long.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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