Bank’s Notice to Insurers of $75 Million Claim Arising from FCA Investigation Ruled Inadequate
A District Court for the Western District of Tennessee recently held that a national bank’s (“Bank”) insurance carriers need not reimburse any part of a $212.5 million False Claims Act settlement with the Department of Justice (“DOJ”) relating to an investigation into the Bank’s origination of FHA-insured loans. The Court found that the Bank failed to provide adequate notice of claims under its insurance policy with several insurers (“Insurers”). Dismissing the Bank’s claims for breach of contract and bad faith denial of coverage, the Court concluded that the Insurers had properly denied coverage, citing the timing and boiler-plate language of the notice provided to the Insurers.
The underlying investigation began in early 2012, when HUD and DOJ issued subpoenas relating to the Bank’s origination of FHA mortgage loans. In May 2013, the Bank attended a presentation by representatives of DOJ, HUD, and state prosecutors detailing the government’s preliminary findings that the Bank had violated the False Claims Act by originating ineligible FHA-insured loans. In February 2014, the Bank executed a tolling agreement with DOJ pending settlement discussions, and, in April 2014, DOJ conveyed a settlement demand to the Bank for damages of $610 million.
In May 2014, the Bank sent an email to the Insurers, stating that it had been cooperating with government officials in a civil investigation regarding its underwriting of FHA-insured loans. The Bank did not indicate that the FHA investigation had become a claim under the policy, nor did it disclose the $610 million settlement demand from the government a month earlier. In June 2015, after several rounds of negotiations, the Bank executed a written settlement agreement in the amount of $212.5 million.
From August 2013 through July 2014, the Bank maintained $75 million of excess risk insurance. As a “claims-made” policy, coverage was provided for claims made against the Bank and reported during the policy term, regardless of when the underlying actions that gave rise to the claims took place. Under the policy, the Bank was required to give the Insurers written notice of any claim no later than 90 days after the end of the period.
The Insurers argued that the settlement was not covered by the insurance policies because they did not receive adequate notice during the policy period. Relying on the plain language of the policy, which defines “claim” as including any “demand for monetary relief,” the Court concluded that a claim first formally arose in April 2014 following the DOJ’s settlement demand. The Court further held that, because the Bank’s May 2014 email did not provide notice of the government’s $610 million settlement demand, it did not provide adequate notice of a claim under the policy. Moreover, the general, boiler-plate type language contained in the May 2014 email did not sufficiently inform the Insurers of the significant exposure relating to the investigation. The Court concluded that permitting the Bank to rely on the email as notice of the April 2014 claim would defeat the purpose of a claims-made policy, which requires insureds to timely notify insurers of exposure to coverage.
The case is First Horizon National Corp. v. Houston Casualty Co., No. 2:15-cv-2235.
