The Seventh Circuit Court of Appeals recently affirmed an insurance company’s denial of a claim for coverage under a directors and officers liability insurance policy when the company and officers did not notify the insurance carrier of an earlier claim against the company from which subsequent claims for damages against the directors and officers arose.  In doing so, the court provided directors and officers with an important lesson about timely reporting of claims under D&O liability insurance policies to ensure that insurance coverage is available to protect them from exposure to significant monetary losses.

About The Insurance Liability Claim

In Hanover Insurance Company v. R.W. Dunteman Company, the court ruled that Hanover properly denied coverage to a corporation and its directors and officers for allegations in an amended complaint filed in a lawsuit after the company did not notify the insurer of the filing of the original lawsuit.  R.W. Dunteman Company was a family-owned company from which a dispute over certain family members’ membership interests arose.  Jane Dunteman’s former husband was the owner of two family-owned companies, and her four sons were the majority shareholders, officers and directors of the companies.   After Mrs. Dunteman’s death, her estate filed a lawsuit against one company, alleging that her ownership interest in the company was wrongfully diluted after she divorced her late husband.  The estate filed suit in 2017, seeking a declaratory judgment as to the percentage of Mrs. Dunteman’s ownership interest in the company.  The four sons were not named in the suit, but the allegations against the company concerned the sons’ actions as officers, directors and shareholders.  In 2018, the estate filed an amended complaint that broadened the allegations of the original complaint and added the other family corporation and the four sons as defendants.  The amended complaint included a claim for damages against the four sons for their alleged conduct.  The company and the sons notified Hanover of the claims in the amended complaint one week later and requested coverage for legal defense fees and any amounts for which they may be liable under a 2018 liability policy that Hanover issued to the companies.  The Hanover policy provided defense and indemnity coverage for a “Loss” that an “Insured Entity” or “Insured Individual” is “legally obligated to pay due to a Claim first made . . . during the Policy Period.”  The term “Claim” was defined to include a civil proceeding commenced by service of a pleading against an insured for a ”Wrongful Act”.  The term “Wrongful Act” was broadly defined to include any actual or alleged act, error, omission, or breach of duty committed or attempted by an insured individual or entity.  Hanover issued a similar policy in 2017 that was in effect when the first complaint in the lawsuit was filed.

Why You Need To File Insurance Claims In A Timely Fashion

Each of the Hanover policies required the insureds to report a claim during the policy period and up to 90 days after the policy’s expiration date.  Hanover denied the insureds claim under the 2018 policy, concluding that the claim for which coverage was requested first arose in 2017 and the insureds did not report the claim under the 2017 policy.  The insureds argued that the first lawsuit did not involve a claim for damages against the sons for a wrongful act and therefore they did not need to report the first complaint.  Like many D&O liability policies, the Hanover policy treated all “related wrongful acts” as one wrongful act that occurred at the time of the first related wrongful act.  The policy broadly defined “related wrongful act” to be any act connected logically or causally by reason of any common fact or circumstance.  The policy also included a “related claim” provision, under which all claims arising from or in any way related to the same facts or circumstance were considered a “related claim.”  All related claims were considered a single claim under the policy in effect when the earliest related claim was made.

The appeals court affirmed the trial court’s decision that Hanover properly denied coverage for the 2018 claim against the individual directors and officers because the 2017 lawsuit was a claim against the insured company that was not reported to Hanover under the 2017 policy.  The court concluded that the company or individual directors and officers were required to notify Hanover when the declaratory judgment lawsuit was first filed in 2017 because the lawsuit was a claim for a wrongful act under the terms of the 2017 policy.  The court rejected the insureds’ argument that the 2018 amended complaint asserted new and distinct claims against additional insureds that were timely reported under the 2018 policy.  The court agreed with the trial court’s conclusion that the allegations in the amended complaint involved wrongful acts that were related to the wrongful act alleged in the 2017 complaint.  As a result, all of the claims asserted in the lawsuit were related and deemed one claim for wrongful acts that first occurred during the 2017 policy period.  Because the insureds did not notify Hanover of the claim until after the 2017 policy expired, they were not entitled to coverage.

Why This Insurance Liability Case Is Important

The R.W. Dunteman Company decision offers some important lessons to insureds.  First, the decision creates a powerful incentive for any company with a claims-made D&O liability policy to notify its insurance carrier of even the most minor claims.  What may first appear to be a minor claim can morph into a more significant claim against the company or additional insureds for which coverage will be required.  Failure to provide notice of the initial claim in accordance with the policy terms can jeopardize coverage for the subsequent claims.  Second, directors and officers of a company need to be vigilant in ensuring that the company they serve timely notifies the insurance company of all claims for which coverage may exist under a D&O liability, regardless of how minor.  As the Dunteman Company case demonstrates, failure to timely notify the insurance company of what may appear to be an initial minor claim can void coverage for individual directors and officers when the minor claim becomes a more significant claim for damages against the directors and officers, leaving the directors and officers exposed to monetary damages for which they may have believed insurance protection existed when they agreed to serve as an officer or director of the company.

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