Ambiguous Insurance Policy Results In Judgment for Insured Despite Late Notice

In George K. Baum & Co. v. Twin City Fire Ins. Co. (2014 WL 3445713), Plaintiff Baum sold and underwrote municipal bonds incorrectly claimed to be tax exempt. When the IRS notified Baum of a pending investigation, Baum relayed the information to its insured, Twin City. Years later, derivative suits were filed but Baum failed to inform the insurer for almost two years. Twin City initially denied coverage, asserting the claim occurred after the policy expired. The insurer changed its reasoning after Baum filed suit, this time denying coverage based on untimely notice. One of the primary disputes concerned the policy’s controlling law, as one state required a showing of prejudice from untimely notice while the other did not. The U.S. District Court of Missouri held Missouri law to be controlling. Twin City conceded it suffered no prejudice.  The Court further held that Baum’s claim was subject to a $3 million self-insured retention. Both parties appealed. The Eighth Circuit held that New York law applied but did not alter the outcome. The question of which law applied was to be decided by the forum state. Under Missouri law, when the policy lacks a choice of law provision, the forum can still conclude which law controls based on other policy provisions demonstrating the parties’ intent. The Court concluded that New York law applied because (1) Baum specifically requested the policy be issued to its New York office to avoid Missouri taxes and (2) the policy included extensive amendments to comply with New York insurance law.

The Court next addressed the untimely notice of the claim. Finding the policy language ambiguous, the Court accepted Baum’s interpretation – that any claims arising out of the original wrongful act were considered to be one claim. Since notice was provided for the original claim, the insurer was precluded from claiming lack thereof for subsequent lawsuits. The Court then rejected Twin City’s attempt to claim implied notice under New York law. It held the arguments to be those of a poor draftsman, and even if they were found to be valid, Twin City waived the defense by failing to raise it initially. The Court upheld the self-insured retention of $3 million against Baum and affirmed the decision.