917 F.3d 269
4th Cir.2019Background
- Gateway Residences hired Mechanical Design Group (MDG) to install life-and-safety generators; the generators later caught fire and damaged property.
- MDG had a claims-made-and-reported liability policy from Illinois Union effective Feb 1, 2014–Feb 1, 2015; the policy required claims be reported during the policy period as a condition precedent to coverage.
- Gateway demanded MDG cure the defective work in Aug 2014; MDG did not report Gateway’s demand to Illinois Union during the policy period and went out of business in Sept 2014.
- Illinois Union first learned of Gateway’s claim in Sept 2016; Gateway obtained a default judgment against MDG and then sued Illinois Union to collect the judgment.
- District court granted summary judgment for Illinois Union, holding the policy did not cover claims reported after expiration and Virginia Code § 38.2-2226 (statutory waiver for untimely denial notice) did not apply.
- Fourth Circuit affirmed: federal diversity jurisdiction was proper (not a § 1332(c) “direct action”), and § 38.2-2226 does not convert noncoverage under a claims-made-and-reported policy into a waivable breach-based defense.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Subject-matter jurisdiction: whether suit is a “direct action” under 28 U.S.C. § 1332(c)(1) | Gateway: suing insurer on policy to collect judgment is a direct action so insurer adopts insured’s citizenship, defeating diversity | Illinois Union: this is not a direct action because Gateway first obtained judgment against the insured before suing insurer | Not a direct action; diversity jurisdiction exists and removal was proper |
| Applicability of Va. Code § 38.2-2226 (45-day notice; waiver of defenses) | Gateway: insurer waived late-denial defense by not notifying claimant within 45 days of discovering the breach/claim | Illinois Union: statute applies only to defenses based on insured’s breach, not to noncoverage where claim falls outside policy scope (claims-made-and-reported) | § 38.2-2226 does not apply; insurer did not waive noncoverage defense |
| Effect of claims-made-and-reported policy wording | Gateway: MDG breached reporting condition by not notifying insurer of 2014 demand, so insurer’s late notice should be waived | Illinois Union: under claims-made-and-reported policies the triggering event is reporting to insurer during policy period; absent reporting during period there was no coverage to breach | The policy’s reporting condition is an essential coverage element, not a waivable breach; no coverage existed when claim was reported post-expiration |
| Remedy / summary judgment | Gateway: seeks recovery from insurer on default judgment against MDG | Illinois Union: no coverage; summary judgment appropriate | Summary judgment for Illinois Union affirmed |
Key Cases Cited
- Kong v. Allied Prof’l Ins. Co., 750 F.3d 1295 (11th Cir. 2014) (defines § 1332(c) “direct action” as suit that permits plaintiff to skip suing the insured)
- Hyland v. Liberty Mut. Fire Ins. Co., 885 F.3d 482 (7th Cir. 2018) (same interpretation of § 1332(c))
- First Am. Title Ins. Co. v. Cont’l Cas. Co., 709 F.3d 1170 (5th Cir. 2013) (explains claims-made policy mechanics and differences from occurrence policies)
- Sherwood Brands, Inc. v. Great Am. Ins. Co., 13 A.3d 1268 (Md. 2011) (explains claims-made-and-reported policies require both claim-made and insurer notification during policy period)
- Morrel v. Nationwide Mut. Fire Ins. Co., 188 F.3d 218 (4th Cir. 1999) (discusses insurer waiver for failure to notify/cooperate under state law)