Lack of Actual Notice Does Not Defeat Policy Exclusion When Insurer Made Sufficient Efforts to Provide Clear and Direct Notice of New Exclusion to Policyholder

The recent decision in MDC Acquisition Co. v. North River Insurance Co., serves as a reminder of the impact that clear and direct notice of policy changes will have on the scope of available insurance coverage. Although rendered by the Northern District of Ohio, the decision is based upon generally accepted legal principles that apply in most jurisdictions and is noteworthy for both insurers and policyholders.

In MDC, the policyholder commenced an action against its insurer seeking to reform its primary and excess general liability insurance policies because it had not received actual notice of a new exclusion that precluded coverage for a claim that presumably would have otherwise been covered. On cross-motions for summary judgment, the Court held that the policy exclusion would be enforced to preclude coverage because the insurer had provided sufficient notice of the exclusion regardless of whether the policyholder had actual knowledge of it. The decision is thus consistent with New Jersey law as expressed in Bauman v. Royal Indemnity Co., 36 N.J. 12, 25-26 (1961).

The policyholder was sued in a putative class action alleging violations of the Telephone Consumer Protection Act and timely tendered the defense of the action to its insurer, which had issued both general and excess liability policies. The insurer denied the request for a defense, relying primarily on the Unsolicited Communications exclusion that had been inserted in the applicable policy upon renewal, which barred coverage for claims such as those alleged in the class-action complaint. The policyholder therefore filed a declaratory judgment action alleging that it did not receive actual notice of the reduction in coverage, and seeking (1) a declaration that the Unsolicited Communications exclusion was null and void, and (2) reformation of the insurance policy to provide the same coverage that existed prior to the insertion of the exclusion.

The Court rejected the policyholder’s arguments and held that, regardless of whether an employee of the policyholder actually received the notice, the insurer took appropriate steps to provide clear and direct notice of the changes in available coverage and therefore the endorsement was valid. Specifically, the Court concluded that the insurer had sent the policyholder a letter notifying it of the anticipated changes in the upcoming renewal, and a second, separate letter that “used bold face and clear language” regarding the effect of the new exclusion. The Court also concluded that the insurer was not required to address the letter to any specific individual because “after the notice reaches the [policyholder] company it is the company’s responsibility to ensure it is routed to the correct person. The problem here is not with the insurer’s notice but with the plaintiff’s mail room.”

MDC highlights for insurers and policyholders alike the importance of clear and explicit notice regarding changes in the scope of available coverage upon policy renewals, as well as the impact that notice may have on the application and enforcement of relevant policy provisions.