Citizens Insurance Company of America v. Assessment Systems Corporation

Background

Citizens issued Assessment Systems a businessowners insurance policy for the period October 15, 2017, through October 15, 2018. The policy was a claims-made policy, meaning coverage depended on the claim being made and reported under the policy’s requirements. The policy provided up to $2 million in coverage per claim and in the aggregate.

The policy stated that insurance applied only if a claim was first made during the policy period or an extended reporting period and was reported as required by the policy. It also required Assessment Systems to ensure that Citizens received written notice of a claim “as soon as practicable.”

Assessment Systems had a separate lawsuit with Crane Institute of America Certification, LLC. After Assessment Systems sued Crane over payment for software and services, Crane filed a counterclaim alleging breach of contract and breach of warranty and seeking nearly $600,000. Assessment Systems knew about the counterclaim by April 26, 2017, but did not notify Citizens until April 19, 2018—approximately one year later and four days before discovery closed in the underlying lawsuit.

Assessment Systems attributed the delay to the failure of its Human Resources Director to inform the company that it needed to notify Citizens. That employee was terminated in December 2017 but continued working for the company until late January or early February 2018 to train a replacement. Assessment Systems’ Vice President of Operations then took approximately two months to provide notice after becoming responsible for the company’s insurance matters.

Citizens appointed counsel for Assessment Systems in May 2018. In the underlying lawsuit, that counsel later obtained partial summary judgment limiting some categories of Crane’s damages, but Crane’s claim for damages based on amounts paid under the contract remained for trial.

The Parties’ Arguments

Citizens sought a declaratory judgment that it had no duty to defend or indemnify Assessment Systems against Crane’s counterclaim because notice was late and the delay prejudiced Citizens’ ability to investigate and defend the case.

Assessment Systems argued that it had provided notice during the policy period. It also argued that the delay did not prejudice Citizens and that whether notice was given “as soon as practicable” presented a factual dispute that prevented summary judgment.

Court’s Analysis

The court applied Minnesota law. It explained that a condition precedent is a contract requirement that must be fulfilled before a party’s obligation arises. The court held that the policy’s language—stating that insurance “only applies if” the claim was reported as required and requiring notice “as soon as practicable”—made timely notice a condition precedent to coverage. The policy did not need to use the specific words “condition precedent.”

The court also held that the notice requirement was material to the policy. Because the policy was claims-made, the reporting requirement helped define the scope of the insurance coverage. The court therefore concluded that the notice condition had to be literally met and could not be excused as an unfair forfeiture.

The court found no genuine dispute of material fact about whether notice was given as soon as practicable. Assessment Systems offered no explanation for the eight-month period between learning of the counterclaim and terminating its Human Resources Director. The court also rejected reliance on the employee’s alleged negligence, noting that she continued working for Assessment Systems after the company identified performance problems, and that Assessment Systems’ later explanation for the Vice President’s delay did not explain the earlier delay.

The court further held that Minnesota law did not require Citizens to prove actual prejudice when notice was a condition precedent to coverage under a claims-made policy. Even so, the court found that Citizens had suffered actual prejudice. Citizens received notice only four days before discovery closed, after Assessment Systems had not obtained discovery about Crane’s damages or deposed witnesses, including Crane’s expert. The court found that Citizens therefore had little opportunity to investigate or defend the remaining damages claims. The earlier partial summary judgment did not eliminate that prejudice because it relied on the contract’s damages limitations and did not resolve the damages claim that remained for trial.

Ruling

Judge Nelson held that the policy required Assessment Systems to notify Citizens of Crane’s counterclaim as soon as practicable as a material condition precedent to coverage. She held that Assessment Systems failed to satisfy that condition, that proof of prejudice was unnecessary, and that Citizens was prejudiced in any event.

The court granted Citizens’ Motion for Summary Judgment. The order directed that judgment be entered accordingly.