The Pitfall of Late Notice: Harvard’s $15 Million Coverage Loss

Harvard University’s (“Harvard”) lawsuit in federal court seeking $15 million in coverage from an excess carrier for its legal fees in a discrimination lawsuit has come to naught in the First Circuit Court of Appeals.

Harvard filed a federal lawsuit in September 2021 to have its excess insurance carrier cover Harvard’s legal costs for defending against a 2014 discrimination complaint and a related 2017 Department of Justice probe. Harvard’s primary insurer’s $25 million liability limit has been exhausted by the legal costs of defending the discrimination lawsuit and responding to the government probe.

The $15 million excess policy had a claims-made and reported provision requiring notice within ninety days of the policy expiration to the excess insurer of any claims made during the policy period. Harvard did not report the 2014 discrimination claim until 2017. It argued unsuccessfully in the United States District Court that the excess carrier had knowledge of the claim and that it had suffered no prejudice. Refer to the article published by Agency Checklists on November 15, 2022, “Late Policy Notice To Zurich Leads To Harvard’s Loss Of $15 Million In Coverage.”

Harvard appealed the federal district court’s ruling in favor of its excess carrier to the First Circuit Court of Appeals. This Court, in a short sixteen-page August 9, 2013 decision, rejected Harvard’s appeal.

The lawsuit over Harvard’s admission policies discriminating against Asian-American applicants

In 2014, the Students for Fair Admissions (SFFA) filed a lawsuit against Harvard, claiming that Harvard imposed a soft racial quota designed to keep the number of Asian American students admitted artificially low. This practice, SFFA alleged, thereby discriminated against Asian American students in favor of other racial groups in violation of Title VI of the Civil Rights Act of 1964.

After the extensive legal discovery of Harvard’s admission records and a fifteen-day jury-waived trial, the federal district court ruled in favor of Harvard. The United States Court of Appeals for the First Circuit heard and denied the SFFA’s appeal. However, the United States Supreme Court granted the SFFA’s application for a writ of certiorari.

Although Harvard had won twice in the courts below, the Supreme Court ruled that Harvard’s admissions policies violated the equal protection clause of the Fourteenth Amendment by considering the race of applicants in their admissions processes.

The Court said that race-based affirmative action programs are unlawful and that colleges and universities can only use an applicant’s discussion of how race affected their life as a factor. The Court rejected Harvard’s argument that its admissions system was necessary to achieve a diverse student body and that it complied with previous Supreme Court precedents. The Court also vindicated the Asian-American students’ claim that Harvard discriminated against Asian American applicants by giving them lower personal ratings.

The Zurich $15 million follow-form excess policy

In 2014, Harvard had a comprehensive coverage “tower” for its potential educational practices risks, which would provide coverage for the SFFA suit.

Harvard’s primary coverage was an Educational Institution Risk Protector liability insurance policy that the National Union Fire Insurance Company of Pittsburgh, PA, issued with a $25 million combined defense and indemnity limit after Harvard’s $2.5 million self-insured retention. Harvard then had, as a second layer, a Zurich American Excess Select policy which followed the form of the National Union policy.

The Zurich policy provided an additional $15 million of combined defense and indemnity limits upon the exhaustion of the National Union limit. Both the Nation Union and Zurich policies had effective dates from November 1, 2014, to November 1, 2015, and were written on a claims-made and reported basis.

The National Union policy had as a condition that “all claims…must be reported to the Insurer no later than ninety (90) days after the end of the Policy Period.”

Occurrence vs. claims-made liability policies under Massachusetts law

Massachusetts law has made a legal distinction between the notice provisions in an occurrence and a claim-made liability policy.

In an occurrence-based policy, coverage is provided for insured events that take place within the policy period without regard to when a claim is filed against the insured. On the other hand, a claims-made policy, like the Zurich excess policy held by Harvard, covers claims that are made against the insured during the policy period, regardless of when the event or act that led to the claim occurred.

Both occurrence and claims-made policies require that insureds report claims to the carrier issuing the policy.

By statute, for occurrence policies, if an insured fails to “seasonably notify an insurance company of an occurrence, incident, [or] claim,” the insurer cannot deny the claim for late notice “unless the insurance company has been prejudiced thereby.”

Under Supreme Judicial Court case decisions, the rule for claims-made policies is the opposite. If an insured fails to report a claim made during the time allowed in the policy, the insurer can deny coverage for a claim made during the policy period but reported after the expiration of the policy for late notice. The insurer does not have to show any prejudice accruing from the late notice. It only has to establish the claim was made against the insured during the policy period but not reported to the insurer during the same policy period.

Harvard’s notice to Zurich in 2017 of the 2014 lawsuit.

On May 23, 2017, Zurich American Insurance Company (“Zurich”) acknowledged receipt of a claim notice from Harvard’s broker, Marsh, regarding the SFFA lawsuit pending in the federal district court for the District of Massachusetts since 2014.

On October 25, 2017, Zurich denied coverage to Harvard based upon the ninety-day claims-made reporting provision under the AIG policy, which provision the Zurich policy followed in form.

At the time Zurich denied coverage, the defense costs Harvard had incurred under the National Union policy totaled $2.56 million, with $22.44 million in coverage remaining. As a result, Harvard and Zurich entered into a tolling agreement to defer litigating coverage unnecessarily.

Harvard’s $15 million coverage suit and appeal against Zurich

By September 2021, the defense costs incurred by Harvard in the SFFA litigation had depleted AIG’s coverage of $25 million. Following Zurich’s refusal to reverse its denial of coverage under the $15 million excess policy, Harvard filed a lawsuit against Zurich in the United States District Court for the District of Massachusetts.

The complaint brought by Harvard sought both declaratory relief and damages for breach of contract.

Zurich defended itself by asserting that Harvard’s delayed notice of the SFFA claim barred any coverage. Eventually, Zurich filed a motion for summary judgment, which Harvard opposed while also requesting permission to conduct additional discovery and compel the production of relevant documents.

The district court ruled in favor of Zurich, granting summary judgment and dismissing Harvard’s discovery-related motions as irrelevant. Harvard responded by filing an appeal with the First Circuit Court of Appeals, claiming prejudicial error in the district court’s decision.

The First Circuit rules Harvard’s error in late reporting the SFFA claim bars coverage

In deciding Harvard’s appeal, the three-judge panel first reiterated that by Harvard electing to sue Zurich in federal court under diversity jurisdiction, the panel was required to apply Massachusetts law to determine the effect of a failure to give notice as specified in an excess insurance policy affording coverage on a “claims made and reported” basis.

The panel made this statement because when a federal court sits in diversity jurisdiction, it must apply state substantive rules of decision as those rules have been articulated by the state’s highest tribunal, which in this case is the Massachusetts Supreme Judicial Court.

In applying Massachusetts case law, as interpreted by the Supreme Judicial Court, the panel noted that not only had the Supreme Judicial Court ruled on the effect of late notice barring coverage under a claims-made policy, but the First Circuit had recognized and applied this Massachusetts rule on four prior occasions.

This rule, as stated by the panel, is that “In Massachusetts, notice provisions of claims-made policies — which require that notice of a claim be given by the end of the policy period or a defined period ending shortly thereafter — are of the essence of those policies.” As a consequence of this rule, the panel affirmed:

“Under Massachusetts law, then, an insurer is not required to show prejudice before denying coverage due to an insured’s failure to comply with the notice requirement of a claims-made policy.”

The Court then pointed out that Harvard’s purchase of a claims-made policy from Zurich was not disputed by either party. Also, there was no dispute that Harvard failed to provide Zurich with written notice until May 2017, well past the specified deadline in the policy. As a result, the panel ruled Zurich was within its rights to deny coverage based on the lack of timely notice.

The Court rejects Harvard’s argument for an “actual knowledge exception for late notice

Notwithstanding the black letter law in Massachusetts about late notice on claims-made policies, Harvard argued for the First Circuit to reverse the summary judgment proposing that Massachusetts law would allow for the satisfaction of the policy’s notice requirement if the insurer had “actual knowledge” of the SFFA claim and that issues of material fact, barring summary judgment remained as to whether Zurich had actual knowledge of the SFFA claim in 2014.

This argument, the Court labeled as “little more than gaslighting.”

The justices pointed out that Harvard’s stance essentially suggested that the policy’s notice requirement should not be enforced because Zurich may have had actual notice of the claim. This, according to the Court, was just another way of saying that Zurich was not prejudiced by the lack of timely written notice.

The Court emphasized that accepting such an argument would improperly blur the crucial distinction made by the Massachusetts Supreme Judicial Court between occurrence-based and claims-made policies.

The final order by the First Circuit Court of Appeals

The Court ended its decision stating: “For the reasons elucidated above, the judgment of the district court is:

AFFIRMED

Does Harvard have any further appeal?

Harvard has no further appeal as of right from the First Circuit’s decision. It can petition the U.S. Supreme Court for a discretionary writ of certiorari, as did the Students for Fair Admissions in the underlying case.

Per the Supreme Court’s website, the Court receives 8,000 petitions for certiorari for each year’s October to June term. The Court only accepts about one percent or eighty of these filed petitions for hearing during each term.

Beyond the low odds of acceptance for all cases, any petition by Harvard would face the added problem that its case against Zurich involved Massachusetts law as determined by the state’s Supreme Judicial Court. Since none of its arguments involved federal constitutional or statutory claims, as opposed to the Students for Fair Admissions, who sued Harvard under the federal Civil Rights Act of 1964, there seems little hope for any further proceedings in this case.

Owen Gallagher

Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists

Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.

Connect with me directly, by calling me at 617-598-3801.