No Coverage Where Bank Failed to Provide Timely Notice, Fourth Circuit Decides

The U.S. Court of Appeals for the Fourth Circuit, affirming a decision by the U.S. District Court for the District of Maryland, has ruled that an insurance company had no obligation to defend a bank that had not provided notice of a lawsuit “as soon as practicable,” as required by its insurance policy.

Background

On June 18, 2008, the designated agent for American Bank Holdings, Inc., was served with a summons and complaint that issued from a state court in Belleville, Illinois. Due to an internal oversight, however, American Bank did not respond to the summons, and the state court, on July 23, 2008, entered a $98.5 million default judgment against American Bank.

American Bank contended that it first learned of the suit around February 13, 2009 and that it provided its insurance company, St. Paul Mercury Insurance Company, with notice of the suit on February 25, 2009.

St. Paul denied coverage on the ground of late notice.

Thereafter, American Bank was able to have the default judgment vacated and the lawsuit dismissed, but at an expense of about $1.8 million.

St. Paul went to court, seeking a declaratory judgment that it had no duty to pay for American Bank’s defense.

The Maryland district court entered judgment for St. Paul. Among other things, the district court concluded that because American Bank had not provided St. Paul with notice “as soon as practicable,” as required by the terms of its insurance policy, and because the late notice had caused St. Paul prejudice, St. Paul was within its right to deny coverage.

American Bank appealed, arguing that its obligation to notify St. Paul had not been triggered until it had actual knowledge of the action and that, measured from that time, its notice had not been late. American Bank asserted that “common sense dictates that there can be no obligation to notify St. Paul of a claim until the insured has actual knowledge of it.”

The Fourth Circuit’s Decision

The Fourth Circuit affirmed.

In its decision, the circuit court first rejected American Bank’s argument that it was required by the policy to give notice only after it had received “actual knowledge” of the lawsuit. The circuit court reasoned that there was no support for that position in the St. Paul policy, adding that the term “actual knowledge” was “foreign to the notice provision contained in the policy.”

The circuit court then found that, in any event, American Bank had received actual knowledge of the suit as a matter of Maryland agency law on June 18, 2008, when its agent had been served with process. It ruled that internal “corporate screw-ups” provided no basis to excuse American Bank’s failure to give St. Paul timely notice of the underlying lawsuit after being validly served with process.

Next, the Fourth Circuit ruled that the February 25 notice did not satisfy the policy’s notice provision, declaring that American Bank had a continuing duty to provide notice as soon as practicable, as long as the as-soon-as-practicable notice “did not come later than 60 days after the policy term” (as provided by the policy), and that American Bank had not complied with that duty.

Finally, the circuit court decided that American Bank’s late notice had prejudiced St. Paul because it had denied St. Paul the opportunity to participate in the selection of counsel, to speak with counsel, to discuss credible defense strategies for dismissing the lawsuit before the default judgment, and to involve itself in considering the possibility of settlement negotiations prior to the default judgment and prior to the expenditures incurred by American Bank to vacate the default judgment.

The case is St. Paul Mercury Ins. Co. v. American Bank Holdings, Inc., No. 15-1559 (4th Cir. April 14, 2016).