Hunton Insurance Recovery Blog

A D.C. federal judge recently held that an insurer could be responsible to a TV station for more than $25 million in an underlying malpractice suit where the insurer failed to send timely notice preserving its rights under the policy in violation of a Virginia statute.

Atlanta Channel, Inc. (ACI) filed a legal malpractice lawsuit against its attorney, Henry Solomon, for negligently submitting a defective application with the Federal Communications Commission in 1999. At the time of the alleged malpractice, National Casualty Insurance Co. insured Solomon under a professional liability insurance policy. Solomon did not alert National Casualty of the potential claim until 2012—12 years after he submitted the defective application for ACI’s special broadcasting license. Once National Casualty received notice of the claim, it agreed to defend Solomon under a reservation of rights. In its first reservation of rights letter, National Casualty stated that Solomon had breached his notice obligations under the terms of the contract.

After ACI’s malpractice lawsuit was set for trial and Solomon claimed he lacked resources to satisfy any judgment against him, National Casualty filed a declaratory judgment action seeking a ruling that it did not have a duty to defend or indemnify Solomon because he failed to provide timely notice. ACI and Solomon argued that National Casualty was nonetheless obligated to pay any judgment because it failed to meet its own notice requirements under a Virginia statute, requiring that National Casualty provide notice of its reservation of rights letters to the claimant (ACI) within 45 days after those letters were sent to Solomon.

Despite all parties agreeing that Virginia law governed the dispute, National Casualty argued the Virginia notice statute was procedural, not substantive and therefore should not apply to a D.C. federal court sitting in diversity under the Erie doctrine. ACI and Solomon countered that the statute applied and that, because ACI was not provided timely notice of the reservation of rights letters, National Casualty waived any defenses it may have had based on Solomon’s allegedly untimely notice.

The court agreed with ACI and Solomon, holding that the Virginia notice statute was substantive in nature and that any judgment entered in favor of ACI against Solomon may be enforced against National Casualty, notwithstanding any breach of the policy’s notice condition by Solomon. Virginia law places strict statutory notice requirements on insurers. This includes the obligation under Virginia Code Section 38.2-2226 to notify claimants or their counsel of a reservation of rights within 45 days after the letter is sent to the policyholder. In the Solomon case, it was undisputed that ACI did not receive National Casualty’s reservation of rights letters within the 45-day window required under the statute.

Reiterating the “broad command of Erie” that a court sitting in diversity should apply state substantive law and federal procedural law, the court found that the Virginia statute applied to National Casualty’s handling of Solomon’s claim. To hold otherwise, the court reasoned, would encourage forum shopping and create inequity in administration of the law, the “twin aims” discouraged under Erie. Because National Casualty failed to provide ACI with proper notice under Virginia’s substantive notice statute, the court held that any judgment against Solomon may be enforced against the insurer.

The ACI dispute is interesting for several reasons. For one, the court highlighted that National Casualty did “not engage at all” with the contention that it was bound by Virginia law, whether substantive or procedural, due to its agreement in the policy that any provision in conflict with Virginia statutes will be amended to conform to such statutes. Equally surprising was the insurer’s argument that a Virginia statute “aimed at addressing the potential inequity caused by an insurer’s failure to provide a claimant notice of defenses” was procedural not substantive in nature. While declining to impose sanctions and recognizing the somewhat “enigmatic” intersection of law governing a D.C. federal court sitting in diversity asked to determine the nature of another state’s law, the court quickly dispatched National Casualty’s “procedural” argument, citing both D.C. and Virginia law demonstrating that, under any measure, the statute was substantive in nature.

More generally, the case demonstrates that, while policyholders are most often defending against untimely notice defenses (like Solomon faced with National Casualty), insurers may also have their own notice obligations under state law that can excuse policyholders from strict compliance with policy terms or conditions. Since many policies impose somewhat subjective notice deadlines, such as “as soon as practicable,” the insurer’s notice requirements may even be stricter than the policyholder’s, as was the case in Solomon where Virginia law required an exacting 45-day notice deadline. These issues are fact-specific and turn on a careful understanding of both the relevant policy language (including provisions like National Casualty’s stating that the policy “conform” to applicable law) and choice-of-law analysis to determine that state law governs the coverage dispute.