Harvard College Sues Zurich to Overturn A Late Notice Denial of A $15 Million Policy Claim

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The President and Fellows of Harvard College (Harvard) recently filed in the United States District Court to have its excess carrier begin to pay legal fees for Harvard’s defense of a 2014 discrimination suit and a related 2017 Department of Justice investigation. Harvard’s legal fees defending the suit and responding to the government investigation exhausted its primary insurer’s $25 million liability limit.  The excess carrier, however, had denied coverage alleging Harvard failed to report the lawsuit per the claims-made provision of the excess policy in a timely manner.

The potential error of Harvard in reporting the 2014 lawsuit late to its excess carrier in this major lawsuit drives home a key point for insurance agents that have any client whose insurance programs involve claims made and reported policies. For those policies, agents should advise their insureds that they can never send too many notices to their insurers advising of actual or potential claims.

In Harvard’s case, it notified its primary carrier, AIG, of a 2014 lawsuit seeking to have the federal court declare that Harvard’s admissions practices discriminated against Asian applicants. Harvard had an AIG policy that provided $25 million in defense cost or indemnity coverage. Harvard satisfied the AIG policy’s claims made and reported provision that required the reporting of claims made as soon as practicable and in any event within ninety days at the end of the policy year.

Harvard had also purchased a follow-form excess policy from Zurich American Insurance Company (Zurich) that had a $15 million limit.  Harvard did not formally notify Zurich of the 2014 lawsuit until May of 2017. In October of 2017, Zurich denied coverage based upon the claims-made reporting provisions required by the terms of the AIG policy, which the Zurich policy followed in form.

Since Zurich’s 2017 denial of coverage, Harvard’s legal fees to defend the 2014 lawsuit and to respond to a related Department of Justice investigation about discriminatory admission policies at Harvard have exhausted the AIG policy’s $25 million limit.

Last month, Harvard filed a declaratory judgment action in federal court in Boston against Zurich seeking a declaratory judgment that Zurich could not rely upon late notice of the 2014 lawsuit because Harvard alleges that it can prove that Zurich had knowledge of the 2014 action “by late 2014, or early 2015, and no later than January 30, 2016.”

Harvard’s argument about Zurich’s actual notice and any lack of prejudice would have more legal heft if the policy that it was suing on were an occurrence-based one. However, Zurich’s policy has as a condition precedent for coverage that Harvard had to have reported any claims made during the policy period or, in any event, within 90 days of the end of the policy period. Notwithstanding any bits of knowledge that Zurich might have had about the 2014 lawsuit, the failure of Harvard to formally report the lawsuit as a claim within the policy period may cause Harvard difficulty under the Massachusetts case decisions relating to claims-made policies.

The primary AIG policy and the follow-form Zurich excess policy that Harvard purchased

Harvard purchased a manuscript policy entitled “Educational Institution Risk Protector” from AIG for the one-year period from November 1, 2014, to November 1, 2015, paying a premium of $1,667,866.00.

The policy had a $25 million limit of liability, with Harvard paying the first $2.5 million as a self-insured retention.

The AIG policy provided broad liability coverage for Harvard as an organization. The policy provided that the insurer would “pay the Loss of [Harvard] arising from a Claim first made against [Harvard] during the Policy Period…for any Wrongful Act of [Harvard].

The definition in the AIG policy for covered wrongful acts of Harvard included any actual or alleged:

[A]ct, omission, breach of duty, neglect, error, statement, misstatement, misleading statement, negligent supervision of or failure to supervise by [Harvard].

Harvard also purchased from the Zurich American Insurance Company an “Excess Select Insurance Policy.” This was a “follow form” policy that stated it “follows to the terms, conditions, and limitations of the followed policy which, is in case, was the [AIG] primary policy of $25 million.

The aggregate limit of liability on the Zurich policy was $15 million, and it had a similar November 1, 2014, to November 1, 2015, policy period with a premium of $370,000.00.

Students for Fair Admission sue Harvard for admission discrimination

On November 17, 2014, Students for Fair Admissions, Inc. (“SFFA”) filed a complaint against Harvard in the United States District Court for the District of Massachusetts.

Per its website, SSFA is “a nonprofit membership group of more than 20,000 students, parents, and others who believe…. [a] student’s race and ethnicity should not be factors that either harm or help that student to gain admission to a competitive university.” The organization’s stated mission is to support and participate in litigation concerning the use of race in college admissions programs.”

SFFA sued Harvard in 2014, arguing that Harvard’s admissions policies discriminated against Asian-Americans and gave unlawful and unfair preferences to white, Hispanic, and black applicants.

The SFFA complaint alleged that Harvard’s admissions policies violated Title VI of the Civil Rights Act of 1964, which states that:

No person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance.

The SFFA complaint sought rulings that Harvard’s admission practices constituted a: (1) Violation of 42 U.S.C. § 2000 (Intentional Discrimination Against Asian Americans); (2) Violation of 42 U.S.C. § 2000 (Racial Balancing); (3) Violation of 42 U.S.C. § 2000 (Failure To Use Race Merely as a “Plus” Factor in Admissions Decisions); (4) Violation of 42 U.S.C. § 2000 (Failure to Use Race to Merely Fill the Last “Few Places” in the Incoming Freshman Class); (5) Violation of 42 U.S.C. § 2000 (Race-Neutral Alternatives); and (6) Violation of 42 U.S.C. § 2000 (Any Use of Race as a Factor in Admissions).

Harvard makes a timely report of the SFFA lawsuit to AIG but not Zurich

The AIG policy provided if Harvard sought coverage for any claim or suit that:

[Harvard], as a condition precedent to the obligations of [AIG] under this policy, give written notice to [AIG] of any Claim made against [Harvard]…as soon as practicable after (i) [Harvard’s] Risk Manager or General Counsel (or equivalent position) first receives notice of the Claim…

While Harvard had some leeway on reporting a claim or suit based upon the “as soon as practicable” language in the AIG policy’s notice provision, the policy did have a definite reporting limit of ninety days after the policy’s expiration date. The policy stated: “all Claims …must be reported to the Insurer no later than ninety (90) days after the end of the Policy Period….”

The AIG policy was a pure indemnity policy. AIG policy did not assume any duty to defend. Instead, under the policy, “[Harvard”] shall defend and contest any Claim made against [it]” and [AIG] shall advance Defense Costs of such Claim, excess of the applicable retention amount, no later than 90 days after the receipt by [it] of itemized bills for such Defense Costs in excess of the applicable retention.”

Harvard notified AIG in a timely manner of the SFFA lawsuit, and AIG affirmed coverage and began paying Harvard’s lawyers to defend the lawsuit.

The Zurich policy followed the form of the AIG policy. However, the Zurich policy specifically provided that, “As a condition precedent to exercising any rights under this policy, [Harvard] shall give the [Zurich] written notice of any claim or any potential claim under this policy or [the AIG policy] in the same manner required by the terms and condition of the [AIG policy].”

The Zurich policy emphasized that Harvard had to give a separate notice to Zurich with a policy provision that stated, “notice to the insurer(s) of the Followed Policy [AIG’s policy] or other Underlying Insurance does not constitute notice to [Zurich].”

Harvard did not report the SFFA lawsuit to Zurich during the policy period. It was not until May of 2017 that Harvard formally reported the suit to Zurich.  

Seven years of SFFA litigation and four years of a Department of Justice investigation

In September 2017, the SFFA suit had been in litigation for three years when the Department of Justice informed Harvard that it was opening an investigation of Harvard College’s admissions process.

Harvard notified its carriers that the United States Department of Justice had opened an investigation into the same admission policies that the 2014 lawsuit alleged were discriminatory.

The policies that Harvard purchased, like the 2014-2015 AIG policy, had investigation coverage that provided indemnity for any “civil, criminal, administrative, regulatory investigation of [Harvard] by a federal….government, regulatory authority or agency, including but not limited to an investigation brought by the …Department of Justice…”

Ordinarily, one would believe that under a claim made and reported policy, the SFFA lawsuit, which was submitted as a claim in 2014 and reported to AIG by Harvard in that year, and the Department of Justice investigation, which began in 2017, would be claims subject to different policy years. However, as in many complex policies, like the Harvard Educational Institution Risk Protector liability insurance policy, have a provision for interrelated wrongful acts or “Related Wrongful Acts.”

“Related Wrongful Act(s)” means Wrongful Act(s), which are the same, related, or continuous, or Wrongful Act(s) which arise from a common nucleus of facts.

AIG classified the SFFA lawsuit and the Department of Justice investigation as related wrongful acts since they both arose out of the common nucleus of facts concerning Harvard’s admission procedures and policies.

As a result, AIG allocated the defense costs from the SFFA lawsuit and the Department of Justice investigation to Harvard’s 2014-2015 policy with an aggregate limit of $25 million.

The month after Harvard reported the Department of Justice investigation, Zurich denied coverage to Harvard based upon the failure of Harvard to originally give notice as required by the policy of the SFFA lawsuit.

Defense costs exceed the AIG’s $25 million liability limit

The SFFA lawsuit, which is still alive, has lasted almost seven years.

During that time, Harvard’s defense costs paid by AIG included legal fees and expenses, costs associated with electronic discovery vendors, expert witness fees, and court costs. Harvard and the SFFA engaged in extensive pretrial discovery and motion practice. Eventually, the parties had a three-week jury-waived trial. Although the federal judge hearing the case ruled in favor of Harvard on all counts, SFFA appealed the judgment to the United States Court of Appeals for the First Circuit.

After the First Circuit Court of Appeals ruled in favor of Harvard and upheld the district court’s decision, SFFA filed for a writ of certiorari to the United States Supreme Court. SFFA’s application for a writ of certiorari is still pending before the Supreme Court.

At the same time, in connection with the Department of Justice investigation, Harvard collected and produced thousands of business records. The Department of Justice investigation is also still pending.

As a result of the protracted litigation of the SFFA lawsuit and the Department of Justice investigation, Harvard’s defense costs exhausted the $25 million limit of the AIG policy, causing Harvard to file its lawsuit to overturn Zurich’s denial of coverage.

On a claims-made policy, late notice allows an insurer to deny without showing prejudice

The major issue for Harvard in obtaining coverage from Zurich is the question of how it can overcome the Massachusetts case decisions that hold “…for an insurer to be entitled to deny coverage under a “claims made” policy, it must only show that the insured did not report the claim within the same policy year in which he received notice of it; no showing of prejudice need be made.”

Harvard’s lawsuit claims that Zurich would have had knowledge about the 2014 SFFA lawsuit based upon national television news coverage and contemporaneous news articles published in The New York Times, the Wall Street Journal, USA Today, The Associated Press, and the Washington Post. That may be true, but it also may not be enough. The AIG and Zurich policies are interpreted under Massachusetts law, and the law in Massachusetts concerning notice under claims made and reported policies is strictly construed: No notice, no coverage.

For occurrence policies, which most main-street agents deal with for liability policies, the rule is exactly the opposite. By statute, an insurer issuing an occurrence-based policy cannot deny coverage “because of failure of an insured to seasonably notify an insurance company of an occurrence, incident, claim or of a suit…unless the insurance company has been prejudiced thereby.”

Agency Checklists will keep its readers informed about this interesting case.