6th Circuit Affirms Rejection of Bank’s Insurance Claim as Untimely
The Sixth Circuit Court of Appeals recently held that a bank was not entitled to insurance coverage for its mortgage settlement with the government because the bank’s notice to the insurers did not disclose the claim made upon it, was untimely, and was insufficiently detailed.
The underlying matter began in 2012 with a government investigation into the bank’s alleged violation of the False Claims Act, regarding compliance with FHA mortgage requirements. In May 2013, the government presented to the bank its findings that a violation occurred and potential damages. In April 2014, the government proposed a $610 settlement offer, by both phone and email. The email referred to the $610 million as a “settlement offer.” In May 2014, the bank submitted a Notice of Circumstances to its insurers, but did not disclose the April 2014 settlement demand. In December 2014, the government reported to the bank that the investigation was “substantially complete” and required a response to the April 2014 settlement demand, otherwise the suit would proceed. In January 2015, the bank represented to the insurers that the government “still made no claim or demand.” In February 2015, the bank notified the insurers of its intent to offer a $50 million settlement. In March 2015, the bank requested funding from the insurers for an $85 million settlement. In April 2015, the bank filed suit to seek a declaratory judgement that it was entitled to coverage. Finally, in June 2015, the bank and the government settled for $212.5 million.
The district court held that the April 2014 settlement demand constituted a “claim” as defined in the insurance policy and that the untimely notice precluded coverage under applicable state law. Under the insurance policy, a notice of circumstances is filed when the insured “first become[s] aware of any circumstances which may reasonably be expected to give rise to a Claim.” The Sixth Circuit affirmed, emphasizing that the April 2014 email “even describes itself as a ‘settlement offer’” and that the government’s willingness to continue negotiating did “not negate the existence of a demand; rather the existence of settlement negotiations presupposed a demand.” Here, the bank did not give a Notice of Circumstances when it became aware of the circumstances in 2013, and did not sufficiently notify the insurers of the government’s claim with the 2014 Notice of Circumstances.
Additionally, the district court held that the Notice of Circumstances was insufficiently detailed, and the Sixth Circuit affirmed on this grounds as well. The courts emphasized the bank’s failure to mention the $610 million settlement offer. Finally, the Sixth Circuit rejected the bank’s attempt to characterize the Notice of Circumstances as a notice of claim because as a “reference to a potential ‘demand or claim,’” it “conveys to any reasonable reader that no actual ‘demand’ or ‘claim’ exists.”
The opinion in First Horizon Nat’l Corp. v. Houston Cas. Co., is accessible here.
