Plaintiff, J.P. Morgan Chase & Company, filed suit against Twin City Fire Insurance, Inc. seeking a declaration that Twin City is obligated to indemnify plaintiff for losses incurred in connection with the defense and settlement of a series of federal court cases arising out of Enron’s financial collapse. Plaintiff sought damages in excess of $20 million.

Twin City was a $22.5 million participant in a combined lines program providing plaintiff with a total of $200,000 million in bankers’ professional liability insurance effective November 30, 1997 to November 30, 2001. Twin City was not a participant at the inception of the program, but effective July 15, 2000, it replaced Reliance Insurance Company as an excess insurer. The claims-made policy afforded coverage for both claims made against the insured during the policy period, as well as claims made subsequent to the policy period provided the insured gave notice during the policy term of any act, error, or omission that would subsequently give rise to a claim.

In late November 2001, the 97-01 program was expiring and plaintiff was seeking a renewal of its insurance for the 2001-2002 policy period. At that time, Enron’s credit rating had been down-rated to junk status, and there was speculation in the press that Enron was headed for bankruptcy. As JP Morgan’s insurers were becoming concerned about the possibility of providing coverage for Enron claims in the new policy period, the insurers inquired whether the plaintiff had notice or was going to notice potential Enron claims under the 97-01 policy.

Plaintiff’s vice president made the decision to notice the potential claims under the 97-01 program because he was concerned about potential claims that might arise from the plaintiff’s provision of professional services to Enron, and because he wanted to obtain coverage for the 01-02 period. On November 29, 2001, the plaintiff’s insurance broker sent an e-mail to the 01-02 insurers, including Twin City, advising that it would agree to put the expiring contract on notice of the Enron circumstance.

On November 29, 2001, three hours before the 97-01 policy was to expire, plaintiff sent an e-mail providing notice that plaintiff anticipated it may be named in litigation expected to arise out of the financial difficulties of Enron. The notice provided that the potential claims could include allegations of breach of a fiduciary duty, fraudulent conveyance, and misrepresentations.

After defending and settling litigation that did indeed result from the Enron melt-down, the plaintiff sought reimbursement under the Twin City policy. Twin City countered that plaintiff did not satisfy the notice provisions of the policy because at the time of the email, the plaintiff had no awareness of any wrongful act nor did the notice identify any specific wrongful act.

The court disagreed and stated that it was clear from the record there was a heightened awareness by both the plaintiff and its insurers in the days prior to the expiration of the 97-01 policy of the pending implosion Enron. This awareness led to the last-minute notice of potential claims encompassing a wide range of legal and financial issues that were almost certain to arise.

The court concluded that the notice at issue here made reference to Enron, plaintiff’s catalog of transactions with Enron and was analogous to, if not more detailed than, other notices that have been held to be sufficient pursuant to similar notice provisions in claims-made policies. Accordingly, the court affirmed the award of summary judgment in favor of the policyholder.

Impact: The insurer had a fair argument that the notice provided by the policyholder was somewhat vague. At the time the notice was provided, it seemed likely that claims arising out of the Enron melt-down were likely, but there certainly were no claims existing at that time, nor were there any specific allegations that the policyholder could point to. Despite this, the court held that the notice requirement was satisfied. Arguably, the close interaction between the policyholder, the broker, and the insurers in the time leading up to the expiration of the 97-01 policies, as well as the issuing of policies for the 01-02 period, likely hurt the insurer’s argument that the notice provision was not satisfied. In the end, the court concluded that the last-minute e-mail sent by the policyholder provided sufficient notice to the insurer and complied with the policy.
 

For a copy of this decision, click here: http://insurancecoverage.typepad.com/insurance_and_reinsurance/2010/04/cases-for-professional-liability-monthly-april-edition.html