(February 2020) - In ADI Worldlink, LLC. v. RSUI Idemnity Co., 932 F.3d.369 (5th Cir. 2019), the Fifth Circuit affirmed the judgment of the District Court for the Eastern District of Texas, finding that an "interrelatedness provision" of a claims made and reported policy, when read in conjunction with the policy's notice requirement, precluded coverage for all wage claims against an insured, including those which were timely reported under a subsequent policy.

This case arises out of a coverage dispute between ADI Worldlink, LLC (ADI) and RSUI Indemnity Company (RSUI) related to claims filed against ADI for failure to pay overtime wages to nonexempt employees. In July of 2014, two ADI field engineers filed complaints before the American Arbitration Association (AAA), alleging that ADI failed to pay them overtime for at least three years and had improperly categorized them as "exempt" under the Fair Labor Standards Act (FLSA). ADI received notice of the initial AAA wage claims in August of 2014 (2014 Claims). Beginning in April of 2015, additional field engineers employed by ADI in other jurisdictions similarly initiated arbitration proceedings against ADI for failure to pay overtime wages under FLSA (2015 Claims).

On September 16, 2015, more than a year after the filing of the 2014 Claims, ADI notified RSUI of all the wage claims, seeking coverage under two directors and officers (D&O) liability insurance policies issued to it in 2014 and 2015. All claims were reported after the expiration of the 2014 D&O policy and during the 2015 policy period.

Both D&O policies were claims made and reported policies, which generally provide coverage only to those claims which are both made against the insured and reported to the insurer during the policy period.

The policies contained what was referred to by the district court and Fifth Circuit as an "interrelatedness provision," which stated:

All Claims based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events, or the same or related series of facts, circumstances, situations, transactions or events, shall be deemed to be a single Claim for all purposes under this policy, shall be subject to the Retention stated in Item 4 of the Declarations Page, and shall be deemed first made when the earliest of such Claims is first made, regardless of whether such date is before or during the Policy Period.

. . .

(emphasis added).

On October 5, 2016, RSUI denied coverage for the 2014 Claims and 2015 Claims pursuant to the policies' notice requirement. ADI subsequently filed a declaratory action in the district court regarding coverage, and the parties filed cross motions for summary judgment. RSUI argued that it had no duty to defend or indemnify ADI for the 2014 Claims because ADI failed to timely notify RSUI of these initial claims during the 2014 policy period by reporting them in September 2015. RSUI further contended that because the 2015 Claims arose out of the same alleged failure by ADI to pay overtime wages to nonexempt employees, all of the wage claims constituted a "single Claim" that was controlled by the 2014 policy. Accordingly, RSUI argued that the "interrelatedness provision," together with the notice requirement of the 2014 policy, applied to further bar coverage for the 2015 Claims.

The district court noted that pursuant to established Texas law, an insurer may properly deny coverage under a "claims made and reported" policy for failure to timely report without a showing of prejudice to the insurer. Accordingly, RSUI had properly denied coverage for the 2014 Claims pursuant to the policies' terms.

The district court also found that the 2015 Claims were sufficiently related to the 2014 Claims such that they constituted a "single Claim" for purposes of the D&O policies. Specifically, the district court found that the 2014 Claims and 2015 Claims all arose from ADI's alleged decision to categorize its field engineers as "exempt" under the FLSA to avoid paying those employees overtime. The district court further observed that the petitions and the factual allegations underlying the petitions for the 2014 Claims and 2015 Claims were nearly identical.

The district court then turned to the issue of whether the "interrelatedness provision" barred coverage of the sufficiently related 2015 Claims. The district court found that the "interrelatedness provision," when read in conjunction with the notice requirement of the policy, precluded coverage of the 2015 Claims. The district court held:

In the instant case, the Court finds that, by its plain terms, the 2014 Policy's Interrelatedness Condition does not itself exclude coverage. As noted supra, the [2014] Claim and 2015 Claims are sufficiently related to constitute a single claim first made during the 2014 Policy period under the 2014 Policy's Interrelatedness Condition. Accordingly, the [2014] Claim and 2015 Claims constitute a single claim "for all purposes" under the 2014 Policy. It is at this point the Interrelatedness Condition passes the baton. No exclusion has occurred, and no exclusion will occur but for the operation of other provisions in the 2014 Policy. The notice provision ...then kicks in to exclude coverage for the "single claim"—constituted of the [2014] and 2015 Claims—because [ADI] failed to report the claim as required within the 2014 Policy period. To find the Interrelatedness Condition does all of this on its own would defy reason: though the Interrelatedness Condition has the ultimate effect of excluding coverage for the 2015 Claims, it only does so because [ADI] failed to comply with a notice provision located elsewhere in the 2014 Policy. ... [T]he Court finds that the Interrelatedness Condition does not act as an exclusion, but that, once the Interrelatedness Condition is properly applied, the 2014 Policy's notice provision operates to exclude the 2015 Claims from coverage.

Accordingly, RSUI's summary judgment was granted, and ADI appealed to the Fifth Circuit. On appeal, the Fifth Circuit reiterated that despite the fact that ADI provided timely notice of the 2015 Claims during the 2015 policy period, the 2015 Claims sufficiently related back to the 2014 Claims, constituting a single Claim controlled by the 2014 Policy. Specifically, the Fifth Circuit noted the following:

[The "interrelatedness provision"] construes the relevant 2015 claims as being subject to the 2014 policy. That earlier policy would have provided coverage except that the insured failed to comply in 2014 with a notice provision. We conclude the district court was correct to rely on this difference. ... As did the district court, we conclude that the absence of notice, joined with the fact that the 2015 policy deemed all the later claims to fall under the 2014 policy, prevented coverage of the claims.

Accordingly, the district court's judgment was affirmed, and it was found that RSUI had properly denied coverage for both the 2014 Claims and 2015 Claims pursuant to the notice requirement and "interrelatedness provision" of the 2014 policy.

Based on this case, timely reporting in the context of multiple related or similar claims over multiple policy years is not a cut and dry issue. Insurers with subsequent policies containing a similar interrelatedness provision may need to examine whether a timely reported claim sufficiently relates to a prior claim such that coverage is also barred.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.