What You May Not Know About The Supreme Court's Ruling In SFFA—Insurance Coverage Implications For All Industries

On June 29, 2023, the U.S. Supreme Court struck down the race-conscious admissions programs at Harvard University and the University of North Carolina at Chapel Hill in a pair of cases brought by Students for Fair Admissions (SFFA). The Court in SFFA found the universities in violation of the Equal Protection Clause and Title VI of the Civil Rights Act, holding that the diversity-focused admissions programs "lack sufficiently focused and measurable objectives warranting the use of race, unavoidably employ race in a negative manner, involve racial stereotyping, and lack meaningful end points."

While the SFFA decision is sure to bring about additional race-based challenges in the higher-education industry, its impact is already expanding to other industries. Last month, 13 Attorneys Generals sent a July 13, 2023 letter to all Fortune 100 CEOs emphasizing the SFFA holding and reminding companies to comply with race-neutral principles in their employment and contracting practices ("SFAA State AGs Letter"). The letter cautioned that "racial discrimination in employment and contracting is all too common among Fortune 100 companies and other large businesses," and acknowledged that even though done in the spirit of inclusion, "[w]ell-intentioned racial discrimination is just as illegal as invidious discrimination."

But the SFFA suit also had a related insurance coverage case that addressed Harvard's ability to get coverage under its excess liability insurance policy issued by Zurich to cover its attorneys' fees and any settlements/judgments entered in the SFFA case. See President and Fellows of Harvard College v. Zurich American Ins. Co., Case 1:21-cv-11530 (D. Mass. Nov. 2, 2022).After being named in the SFFA litigation back in 2014, Harvard notified its primary liability insurance company of a claim. The primary liability insurance policy—akin to a directors and officers (D&O) policy for educators— provided Harvard $25 million in limits for legal expenses and any other covered losses for the SFFA case, subject to a $2.5 million retention/deductible. However, Harvard's secondary excess insurer, Zurich, claimed the University did not notify it of the SFFA lawsuit until 2017—allegedly more than a year after the Zurich excess policy coverage period had expired. Harvard challenged Zurich's denial of coverage, arguing that the excess insurer was well aware of the litigation due to the significant national and local attention the SFFA lawsuit had received since being filed. Unfortunately for Harvard, the district judge found Zurich's policy terms to be "unequivocally clear," and therefore "strictly construed" the notice of "Claim" provision against Harvard and in favor of Zurich—disregarding the "lack of prejudice, or constructive, or even actual knowledge" held by Zurich regarding the SFFA lawsuit. Although Harvard was ultimately precluded from tapping into its $15 million in excess insurance coverage for losses in the SFFA case, the issue of timely notice of a "Claim" was decided under Massachusetts law, which is in a minority (but growing number) of states that will enforce technical late notice provisions even when the insurer has not—or could not—demonstrate any actual prejudice from late notice.

In light of this outcome with Harvard having to forfeit $15 million of excess coverage for losses incurred in the SFFA case, there are two important takeaways. First, companies should carefully review their D&O and other executive risk insurance policy contracts with the assistance of a broker, in-house counsel, and outside coverage counsel. While not always the case, most insurers will agree to modify their late notice provision (and other conditions to coverage) to include an express requirement that the insured's late notice will not bar coverage unless the insurer "proves actual prejudice." Second, and importantly, companies across all industries should give careful consideration to any letters, notices, inquiries, subpoenas, or other documents they receive from a regulatory agency or other claimant—like the SFAA State AGs Letter —to consider whether any such letter or document constitutes a "Claim" as defined in their D&O insurance policies and, if so, virtually all commercial private and public company D&O policies require the insureds to notice the Claim to the insurer.

For private and public companies, a "Claim" under a typical D&O policy is often defined to include, among others, written demands for non-monetary relief, civil, criminal, administrative, regulatory or arbitration proceedings for monetary, non-monetary, or injunctive relief, and insured person investigations (and for public companies, the Claim usually must also meet the definition of a "Securities Claim"). "Claims" under these policies may also include any Employment Practices Claims. Many companies will receive an informal government inquiry or regulatory letter that may not on its face seem troublesome, but most all D&O policies define a "Claim" as noted above to include a "written demand for monetary or non-monetary relief." Thus, while such regulatory letters or informal inquires may seemingly be innocuous and—at the time—unlikely to lead to litigation or a government investigation or proceeding, companies should still consult with their broker and coverage counsel to carefully consider giving notice to their insurers as a notice of a "Claim" or, in the alternative, notice of a "circumstance" (a potential claim). Doing so will eliminate the unfortunate circumstance seen in Harvard v. Zurich,where Zurich was let off the hook for $15 million on what was unquestionably a mere technicality—as the allegedly one-year plus late notice did not in any way prejudice Zurich.

Regardless of whether engaging in higher-education or any of a multitude of other industries and businesses, the SFFA holding and the Harvard v. Zurich related insurance coverage decision are an unfortunate reminder that insurance companies will invoke and indeed deny legitimate covered insurance claims even where a condition to coverage was not met by the insured—like providing timely notice of a "Claim" "as soon as practicable," or obtaining the insurer's consent to incur defense costs / settle a claim—did not in any way prejudice the insurer or its rights under the insurance policies. Further, the aftermath of the SFFA ruling provides an even more cautionary warning where companies have already or may soon receive a letter or government inquiry similar to the SFAA State AGs Letters where all policyholders—those in higher education and all other industry sectors—must carefully consider their D&O and other applicable insurance policies to assess whether, in the first instance, they should provide notice of a "Claim" or notice of circumstances to their insurers and, second, whether their policies provide or may provide coverage for any SFAA-like claims. All things considered, it is prudent for policyholders to err on the side of giving notice of any DEI-based letters, subpoenas, written requests, and certainly lawsuits to "all potentially applicable insurers in a client's D&O, EPL, and other programs" so as to avoid the risk of a technical late notice defense that, depending on the policy language and applicable state law, may give the insurance company a windfall.

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