Clark’s mistaken beliefs and actions spawned no fewer than four lawsuits. KGM sued the Stormos for wrongful repudiation of their contract based on Clark’s misrepresentations and received compensatory damage. The second suit, filed in late 2010, saw KGM sue Clark himself for “engag[ing] in unfair and deceptive practices by making representations that caused the transaction with the Stormo siblings to fail.” Clark had a professional liability policy issued by State National Insurance. State National defended Clark against KGM’s claim, which ended in settlement and cost State National almost $700,000 before it was resolved.

In the autumn of 2014, the Stormos sued Clark for malpractice and other claims arising from the botched transaction. Clark, however, did not alert State National to the claim for nearly a year. The jury found in favor of the Stormos for more than $5 million. The court then assigned Clark’s ability to sue State National to the Stormo siblings. State National denied coverage for the suit because Clark "knew or could have reasonably foreseen before [the effective date of the policy] that his conduct might be expected to be the basis of a claim."

One of the Stormo siblings, Joan, sued State National for breach and unfair trade practices. The jury found in her favor and awarded more than $1 million in damages. State National asked the court to overturn the verdict, arguing Stormo could not recover from Clark’s policy because Clark had not provided “prompt notice” as required by the policy. Stormo argued State National had to prove it had been prejudiced by the late notice in order to use it as a defense. The trial judges agreed with Stormo. The jury verdict was overturned, and the judges ruled in favor of State National. Stormo appealed.

The Duty of Indemnity

Stormo claimed Clark’s late notice to State National, on its own, was insufficient to support a denial of coverage. She argued that, under Massachusetts state law, an insurer must show how it was prejudiced by late notice in order to preserve the late notice defense.

In Chas T. Main, Inc. v. Fireman's Fund Ins. Co., 551 N.E.2d 28 (Mass. 1990), the Supreme Judicial Court of Massachusetts had pointed out two distinct types of reporting requirements: when notice must be made within the policy period, and when it must be made “as soon as practicable.” In Tenovsky v. All. Syndicate, Inc., 677 N.E.2d 1144 (Mass. 1997), the Supreme Judicial Court determined that “'prompt' notice of 'claims made' requires that notice to the insurer be given no later than sixty days following the expiration of the policy period” (emphasis added).

Stormo, however, pointed back to a policy provision stating multiple claims originating from “a single wrongful act or a series of wrongful acts…[would] be considered first made on the date on which the earliest claim arising out of such wrongful act was first made” (all caps omitted, emphasis added). KGM had sued Clark in 2010 for his conduct in the failed real estate transaction, and State National had defended Clark against that suit. Stormo’s malpractice suit against Clark, which was not filed until 2014, arose from the same behavior. Therefore, according to the policy, the malpractice action was considered “made” in 2010, simultaneously with KGM’s suit against Clark.

Clark could not have reported Stormo’s claim to State National when he reported KGM’s suit because it would not be filed for another four years. This, according to Stormo, was the distinction between the present case and Tenovsky: the problematic claim in Tenovsky had been made during the applicable policy period, so it was reasonable to expect that claim to be reported within the sixty-day timeframe proposed by the court. Clark, on the other hand, could not be held responsible for adhering to such a time frame because it was literally impossible to report Stormo’s suit in 2010.

The judges of the First Circuit disagreed. They pointed out that, since the Chas T. Main decision, no court in Massachusetts had dissected the notice-prejudice rule as Stormo had. The circuit court ultimately agreed with the district court that State National was not required to prove it had been prejudiced by Clark’s late notice. Clark’s failure to provide timely notice relieved State National of its duty to indemnify him. Since State National was not obligated to fulfill its duty of defense, it was impossible for the insurer to commit breach of that duty.

The judgment as a matter of law in favor of State National was affirmed.

Editor’s Note: This case is a good example of why it is so important to make timely claim reports to your insurer, no matter what kind of policy you have. Insurers need time to investigate a claim and determine whether it could or could not lead to coverage. If a claim ends up in court, like this one did, the insurer needs time to hire counsel for their insured and prepare a case.

Read More:

Insureds' Late Claim Report Prejudiced Insurer, Precluded Coverage

Claims-Made Policy and Late Notice

Montrose Endorsement—Shining A Light On the "Known Loss" Doctrine