Failure to Give Notice on a Claims Made & Reported Policy Defeats Coverage

A person holding a judgment against a bankrupt can sue the bankrupt’s insurer to recover a judgment if the policy issued to the bankrupt provided coverage for the tort sued upon with the permission of the bankruptcy court. However, the person holding the judgment must first prove that the facts that resulted in the judgment was covered by the policy.

In Junious R. Valentine v. Federal Insurance Company, NO. 14-18-00438-CV, State of Texas in the Fourteenth Court of Appeals (March 26, 2020) Junious R. Valentine obtained a default judgment in federal court against his former employer (the Hospital) for employment discrimination. In this case, Valentine sued the Hospital’s insurer, Federal Insurance Company, for breach of contract, Insurance Code violations, and conspiracy. The Harris County district court (the trial court) granted Federal’s motion for summary judgment on all of Valentine’s claims.

The parties agree that the Hospital held an insurance policy with Federal that covered employment discrimination claims against the Hospital. The policy was a claims-made-and-reported policy that covered loss from a claim “first made against such Insured during the Policy Period . . . but only if such Employment Claim [was] reported to the Company [i.e., Federal] in writing in the manner and within the time provided in Subsection 12 of this coverage section.” Subsection 12, as amended, provided that as a condition precedent to coverage, the Hospital had to give written notice of an employment claim to Federal “during the Policy Period, or, if applicable, in no event later than . . . 180 days after the end of the Policy Period.” The Policy Period was from November 3, 2013, to November 3, 2014.

During the Policy Period, Valentine filed a charge of discrimination with the Equal Employment Opportunity Commission (EEOC) and then sued the Hospital in a federal district court. On October 5, 2015, the bankruptcy court signed an agreed order lifting the automatic stay to permit Valentine to prosecute his case in the federal district court. The federal district court reinstated Valentine’s case, but less than a month later the Hospital filed a “notice of denial of insurance coverage and reinstatement of stay,” contending that the Hospital had been notified by Federal that insurance coverage for Valentine’s claim had been denied.

The federal district court ultimately rendered a default judgment awarding Valentine damages, attorney’s fees, and costs totaling $87,598. Valentine then sued Federal in a Harris County district court, asserting claims for breach of contract as a third-party beneficiary, violation of the Insurance Code, and conspiracy. Federal moved for summary judgment. Federal’s adjuster filed a declaration on the Valentine matter and testified that Federal’s “claim file” included Valentine’s charge of discrimination, the EEOC’s notice of charge, and Valentine’s complaint from the federal district court. She testified, “Federal did not receive notice of Valentine’s claim from anyone before October 9, 2015” well after the policy expired.

The trial court granted Federal’s motion for summary judgment.

BREACH OF CONTRACT

None of the evidence provided by Valentine, considered individually or in total, gives rise to a reasonable inference that Federal had been notified of Valentine’s claim before October 9, 2015, let alone within 180 days of the Policy Period. Because Federal presented undisputed evidence that Valentine’s claim was not a covered loss, Federal did not breach the policy by denying coverage.

Federal and the Hospital were not in privity. Even if an insurer’s denial of coverage does not necessarily create a conflict for purposes of collateral estoppel the Hospital’s notice of denial of insurance coverage and reinstatement of stay informed the federal district court that coverage had been denied, not that the Hospital agreed with Federal’s decision to deny coverage.

Contrary to Valentine’s allegations nothing in the policy suggests that the notice period should be tolled during bankruptcy.

Because the requirement that a claim be reported to the insurer during the policy period or within a specific number of days thereafter is considered essential to coverage under a claims-made-and-reported policy, most courts have found that an insurer need not demonstrate prejudice to deny coverage when an insured does not give notice of a claim within the policy’s specified time frame.

Federal adduced undisputed evidence that Federal did not receive notice of Valentine’s claim within the Policy Period or the additional 180-day reporting period. Timely notice under this policy is essential to coverage. Because there was no timely notice, there is no coverage, regardless of any showing of prejudice.

Valentine also contended that the trial court erred by granting summary judgment on his Insurance Code claim. Although an insured’s judgment-creditor may be considered a third-party beneficiary sufficient to bring suit against an insurer for policy benefits, there is no evidence that a third-party’s claim based on violations of the Insurance Code, gives standing to a third-party claimant for violation of unfair settlement practice under Section 541.060 of the Insurance Code.

Even assuming Valentine could bring a claim under the Insurance Code as a third-party beneficiary, an insured cannot recover any damages based on an insurer’s statutory violation unless the insured establishes a right to the policy benefits. Because the trial court did not err in granting summary judgment on Valentine’s breach of contract claim, and Valentine alleges no injury independent of a right to policy benefits, the trial court did not err by granting summary judgment on the Insurance Code claim.

Although Valentine had a judgment against the hospital he could only collect that judgment as part of the distribution from the bankruptcy court. He had the right to sue the insurer as the insurer of the bankrupt for up to the limit of the policy, but only if the bankrupt could have received defense or indemnity from the insurer. Since the hospital breached a material condition precedent to coverage by not reporting Valentine’s claim promptly it had no rights and neither did Valentine.


© 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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