Heritage Bank of Commerce v. Zurich American Insurance Company

Background

Heritage Bank of Commerce purchased multiple excess insurance policies from Zurich American Insurance Company beginning in August 2018. The policies applied only if Heritage’s primary insurance from Federal Insurance Company was insufficient to cover a loss. Heritage sought coverage for matters brought by alleged victims of the DC Solar Ponzi scheme, who claimed Heritage had aided and abetted wrongdoing. Heritage sought reimbursement for defense costs and indemnification for part of a $9 million settlement with a bankruptcy trustee.

Heritage first reported the potential losses to Federal. During a July 2019 renewal application, Heritage told Zurich’s underwriting department about a legal-hold letter concerning DC Solar and described the matter as expected to be a “nuisance incident.” Heritage did not send notice to Zurich’s claims department during the applicable period. Zurich argued that the policies required notice to the claims department at a specified address and that it did not receive notice of the claims until February 2021.

Rule 12(b)(6) Standard

Zurich moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. In deciding such a motion, the court generally accepts the complaint’s factual allegations as true and views them favorably to the nonmoving party, but legal conclusions and unsupported statements are not enough.

Policy Type and Notice

The court held that Zurich’s policies were claims-made-and-reported policies. Under that type of policy, both the third-party claim and the policyholder’s report of the claim must occur during the required policy period, subject to any applicable reporting grace period. The court rejected Heritage’s argument that the Zurich policies became ordinary claims-made policies because they followed the Federal policy. The court concluded that the language requiring notice was clear and that the “following” language did not change every basic term of the Zurich policies.

The court held that Heritage did not comply with Zurich’s notice requirement. Heritage relied on its email to a Zurich underwriting employee during the renewal process, but the court concluded that this did not satisfy the requirement to report the claim to Zurich’s claims department. The court also stated that California law does not allow notice of a potential claim to substitute for notice of an actual claim under this type of policy.

The court rejected Heritage’s argument that dismissal was improper because compliance with the policy involved factual issues. It found that there was no dispute about how Heritage attempted to provide notice; the key issue was the meaning of the policy terms. Even accepting Heritage’s allegations as true, the court concluded that Heritage did not comply with the notice provisions.

Forfeiture Argument

Heritage argued that denying coverage based on the notice requirement would be an improper forfeiture. The court disagreed, distinguishing cases involving minor delays from this case, which involved a delay of about two years. The court also emphasized that claims-made-and-reported policies depend on enforcing their reporting deadlines and that these policies generally carry lower premiums in exchange for stricter reporting requirements.

Insolvency Exclusion

The court identified an independent reason Zurich could deny coverage. The Federal policy excluded losses arising from the insolvency of a person or entity or from that person’s or entity’s inability to pay. Heritage’s complaint acknowledged that DC Solar’s bankruptcy prompted the claims against Heritage. Heritage also did not dispute that it could not obtain coverage from Zurich under the excess policy if Federal could not provide coverage under the followed policy. Therefore, the court concluded that Zurich could not be required to pay the claims even if Heritage had complied with the notice provisions.

The court did not separately resolve additional issues concerning the sixth-layer policy because the parties agreed that its terms were the same as those of the first excess policy, and the same coverage problems applied.

Disposition

Judge Richard Seeborg granted Zurich’s motion to dismiss. The court granted Heritage leave to amend within 30 days because the claims were not so clearly futile that amendment should be denied when dismissing a complaint for the first time.