On June 23, 2017, Judge Lipman ruled in First Horizon National Corp., et al. v. Houston Casualty Co., United States District Court for the Western District of Tennessee Case No. 2:15-cv-2235 that First Tennessee Bank’s (Bank) primary insurer, Houston Casualty Company, and seven excess insurers did not have to pay their combined $75 million limits for the Bank’s $212.5 million settlement of claims alleging the Bank violated the False Claims Act. Specifically, the Western District of Tennessee Court (Court) held that the Bank had not provided sufficient notice to the insurers of the circumstances leading up to the deal. In affirming the primary and excess insurers’ denial of coverage for the Bank’s settlement, the Court reasoned that although the claim first arose during the relevant policy period, the Bank failed to provide sufficient details and adequate notice of the claim as required under the primary policy’s notice of circumstances (NOC) provision.

The Bank’s coverage was in effect from August 2013 through July 2014. Although the underlying Department of Justice (DOJ) investigation began in 2012, the DOJ did not share with the Bank its view that the Bank was in violation of the False Claims Act until a May 2013 meeting. Then, in April 2014, the DOJ offered to settle its claims against the Bank for a $610 million payment. The following month, in May 2014, the Bank sent a NOC to its insurers, stating:

“Since second quarter 2012 FHN has been cooperating with the U.S. Department of Justice (DOJ) and the Office of the Inspector General for the Department of Housing and Urban Development (HUD) in a civil investigation regarding compliance with requirements relating to certain Federal Housing Administration (FHA)-insured loans. During second quarter 2013, DOJ and HUD provided FHN with preliminary findings of the investigation, which focused on a small sample of loans and remained incomplete. FHN prepared its own analysis of the sample and has provided certain information to DOJ and HUD. Discussions between the parties are continuing as to various matters, including certain factual information. The investigation could lead to a demand or claim under the federal False Claims Act and the federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allow treble and other special damages substantially in excess of actual losses. Currently FHN is not able to predict the eventual outcome of this matter. FHN has established no liability for this matter and is not able to estimate a range of reasonably possible loss due to significant uncertainties regarding: the potential remedies, including any amount of enhanced damages that might be available or awarded…”

Significantly absent from the Bank’s notice to the insurers was any reference to the DOJ’s $610 million settlement demand.  The following year, in June 2015, the Bank agreed to settle the DOJ’s claims for $212.5 million. The insurers denied coverage for the Bank’s settlement on the grounds that the Bank had not provided timely or adequate notice as required under the primary policy. The Bank then sued its insurers in an effort to obtain the collective $75 million limits from the policies.

Agreeing with the insurers, the Court concluded that the April 2014 settlement offer was a Claim for which the Bank failed to give appropriate notice under the primary policy. The Court reasoned that by not mentioning the DOJ’s $610 million settlement demand, the Bank’s notice did not include sufficient information to alert the insurers of the significance of the claim and failed to comply with the primary policy’s NOC provision requiring “full particulars as to dates, persons and entities involved, potential claimants, and the consequences which have resulted or may result therefrom.” In reaching the holding, Judge Lipman stated “[t]he general, boiler-plate type language contained in the NOC was not sufficient notice of this Claim…To permit Plaintiffs to rely on the NOC submitted in May 2014 as notice of the April 2014 Claim defeats the purpose behind a claims-made policy, wherein the purpose of the notice requirement is to inform the insurer of its exposure to coverage.” The Court further opined that the Bank’s statements in the NOC were “not reflective of the state of affairs at the time” and dismissed all of the Bank’s bad faith claims against the insurers, finding that there was a reasonable dispute among the parties about the timing and coverage for the underlying claim.

This case serves as an important reminder that insureds must provide specific details about claims and potential claims as soon as they become aware of them and not to omit vital information relative to exposure. It also highlights some of the coverage issues that can arise from False Claims Act Litigation. Sedgwick attorneys Kimberly Forrester (SF) and Matthew Ferguson (NY) previously addressed some of these coverage issues, including claims made and reported defenses, that can arise with False Claims Act litigation in their article titled “False Claims Act Litigation and Implications for D&O and Professional Liability Insurers”, which can be found here. As the exposure and frequency of these claims continue to rise for these suits, there is likely to be further court analysis of coverage implications under various provisions of corporate policies.