Cohen-Esrey Real Estate Services, Inc. (Cohen-Esrey) appeals the district court’s award of summary judgment to Twin City Fire Insurance, Inc. (Twin City). CohenEsrey’s claims arose from Twin City’s failure to indemnify it under a claims-made errors-and-omissions policy for liability caused by its employee, Brenda Phillips. The district court held that the policy precluded indemnification becаuse on the policy-inception date Cohen-Esrey was aware of circumstances that it could reasonably have foreseen might result in a claim under the policy. The district court had jurisdiction under 28 U.S.C. § 1332 (diversity jurisdiction). We have appellate jurisdiction under 28 U.S.C. § 1291 and, agreeing with the district court, we affirm.
I. BACKGROUND
Cohen-Esrey managed the Quail Ridge Apartments in El Dorado, Kansas, for its owner, HJS Realty, LLC. The Department of Housing and Urban Development (HUD) subsidized the rent of qualifying Quail Ridge tenants to the extent that it exceeded 30% of the tenant’s income. Phillips was Cohen-Esrey’s on-site property manager at Quail Ridge from March 19, 2001, until September 15, 2006. In that capacity she was responsible for the day-to-day operatiоns of the property, including the submission to HUD of documents reflecting who the tenants were and then-incomes.
From 2004 to 2006, Phillips conducted a fraudulent scheme to embezzle money from Quail Ridge. When a qualified tenant moved out of a unit, Phillips would transfer a qualified tenant from a second unit into the vacated unit and place an unqualified tenant in the seсond unit. She then falsified the lease and HUD verification forms for the units to show qualified tenants living in both apartments and kept for herself the amount paid by the unqualified tenant in excess of the subsidized rental rate.
The scheme was accidentally detected in September 2006 when Phillips was out sick and her substitute was asked for a key by someone who claimed to be a tenant but was not on the rent roll. Soon thereafter Cohen-Esrey notified its insurance carriers. On September 28 it submitted a notice of claim under its Hartford Fire Insurance Company crime policy, which covered employee theft. And on October 30 it submitted a “General Liability Notice of Occurrence/Claim” under its errors-and-omissions policy with Nutmeg Insurance Company, informing Nutmeg of “circumstances that may give rise to a claim.” J.App., Vol. 1 at 227. Both notices said: “Apartment property manager embezzled cash from rents. Loss is approx. $260K.” Id. at 198 (Hartford claim); see id. at 227 (Nutmeg notice). Cohen-Esrey did not, however, inform Twin City of the fraud before November 1, 2006, when the Twin City errors-and-omissions policy replaced the Nutmeg policy.
The scheme was not Phillips’s first misconduct while employed by Cohen-Esrey. In September 2004 she used a company account to make a personal purchase of $115 and then denied the misconduct. Cohen-Esrey required her to repay the money and reprimanded her on January 6, 2005.
On June 7, 2007, HJS wrote CohenEsrey a letter demanding that it pay for the losses to HJS and HUD from Phillips’s
Cohen-Esrey submitted a claim under its errors-and-omissions policy with Twin City, but Twin City denied coverage. Cohen-Esrey then filed a complaint against Twin City in the United States District Court for the District of Kansas, alleging claims for breach of contract, bad-faith refusal to pay, and money owed/reimbursement. 1 Twin City moved for summary judgment on several grounds. But wе need consider only the ground on which the district court based its summary-judgment ruling. The court agreed with Twin City that there was no coverage because of the failure to satisfy the policy’s condition precedent that at the policy’s inception Cohen-Esrey “was [not] aware of [a] Wrongful Act, fact, circumstance or situation that [it] knew or could rеasonably have foreseen might result in a Claim under this Policy.” J.App., Vol. 1 at 155.
II. DISCUSSION
“We review the district court’s grant of summary judgment de novo, applying the same standards that the district court should have applied.”
See Jensen v. Solvay Chemicals, Inc.,
In this diversity action we apply the substantive law of the forum state, Kansas. See id. Kansas courts interpret the provisions of insurance contracts as follows:
First, a court should consider the instrument as a whole and try to ascertain the parties’ intention from the language used, taking into account the situation of the parties, the nature of the subject matter, and the purpose to be accomplished. Second, if a provision is ambiguous, the insurance policy language is tested by what a reasonably prudent insured would understand the language to mean, not by what the insurer intended the language to mean. Third, limiting or exclusionary insurance provisions are to be construed narrowly against the insurer.
Am. Special Risk Mgmt. Corp. v. Cahow,
Cohen-Esrey’s errors-and-omissions policy with Twin City was a claims-made liability policy that covered both loss and defense сosts. “Under a claims-made policy, coverage is only triggered when, during the policy period, an insured discovers and notifies the insurer of either claims against the insured or occurrences that
The policy provision central to the parties’ dispute is in § I. It states that “as [a] condition! ] precedent to coverage hereunder!,] ... as of the inception date no partner, principal, officer, director, or member of the Insured was aware of any Wrongful Act, fact, circumstance or situatiоn that he or she knew or could reasonably have foreseen might result in a Claim under this Policy.”
Id.
at 155. Such pri- or-knowledge conditions are common in claims-made policies because they “ensure that only risks of unknown loss are potentially incurred,”
Cahow,
As the parties agree, the Kansas Supreme Court applies what it terms a two-prong, subjective-objective test to determine whether a prior-knowledge condition has been satisfied. See id. at 628. The subjective prong is “whether the insured knew of certain facts.” Id. at 625. In Cahow the objective prong, tracking the language of the application for the policy, was “whether such fаcts could reasonably have been expected to give rise to a claim.” Id. at 625. 2 The objective prong in this case would accordingly be whether CohenEsrey “could reasonably have foreseen [that the facts known to it] might result in a Claim under th[e] Policy.” J.App., Vol. 1 at 155.
Twin City contends that the prior-knowledge condition was not satisfied because of the facts indisputably known to Cohen-Esrey by November 1, 2006, the inception date of the policy. First, CohenEsrey knew in September 2006 that Phillips had engaged in a scheme to defraud HUD and HJS. Second, it knew that Phillips had fraudulently used a Cohen-Esrey company account to pay personal expenses of $115 in September 2004, and then lied to Cohen-Esrey about doing so, yet Cohen-Esrey had retained her and taken no steps to oversee her work more carefully. From these facts, argues Twin City, any reasonable insured would anticipate that the victims of Phillips’s fraud might claim that Cohen-Esrey had negligently retained and supervised Phillips.
On appeal Cohen-Esrey argues that a proper analysis requires сonsideration of a number of additional facts under the subjective prong of the Kansas test. It asserts that it knew the following: (1) that Phillips had been disciplined on January 6, 2005, for her improper charge to a company account; (2) that Phillips reimbursed Cohen-Esrey and neither Cohen-Esrey, HUD, nor HJS suffered a loss from that misconduct; (3) that Quail Ridge passed a HUD audit every year of Phillips’s embez
Cohen-Esrey contends that considеration of these facts would render unforeseeable a claim against it of negligent retention and supervision. It points out (1) that the company did not believe it was negligent and did not know how it could have prevented Phillips’s embezzlement beyond employing the internal and external controls already in place, and (2) that Phillips testified that she did nоt know how her scheme would have been detected had she not been out sick. Further, Cohen-Esrey argues that the question of foreseeability is ordinarily a question of fact for the jury and can be determined as a matter of law “[o]nly when reasonable persons could arrive at but one conclusion.”
Kansas State Bank & Trust Co. v. Specialized Transp. Servs. Inc.,
We are not persuaded. Cohen-Esrey knеw that Phillips had defrauded HUD and HJS and that she had previously been caught engaging in theft and dishonesty yet had not been fired or subjected to stricter oversight. To be sure, a claim against Cohen-Esrey for negligent retention and supervision was not a certainty. But any reasonable insured under such a professional errors-and-omissions policy would know that a сlaim of such negligence was more than colorable. Certainly any insured “could reasonably have foreseen [that these facts] might result in a Claim under this Policy.” J.App., Vol. 1 at 155 (emphasis added).
Cohen-Esrey misses the point when it focuses on whether it could reasonably have predicted that Phillips would engage in her fraudulent scheme. True, not everyone who steals $115 will engage in a much larger and more complicated embezzlement scheme. And the failure of several external and internal audits and controls to detect her scheme may have given Cohen-Esrey a sense of security about Phillips’s virtue. But these observations are most relevant to whether Cohen-Esrey was in fact negligent in rеtaining Phillips and not monitoring her more closely, not to whether a victim of Phillips’s scheme would
claim
that Cohen-Esrey bore responsibility. Only if a reasonable insured would have concluded that Cohen-Esrey had a sure and obvious defense to a negligent-retention-and-supervision claim — a defense so sure and obvious that a victim would very likely not bother to make the claim — would the policy’s condition precedent be satisfied. It would not be satisfied simply by a showing that a claimant would likely lose. After all, it bars
coverage
if Cohen-Esrey was aware of facts or circumstances from which it was reasonably foreseeable that a
claim “might result.”
The Third Circuit has construed a prior-knowledge exclusion to require almost a certainty that no claim would be pursued against the insured.
See Coregis Ins. Co. v. Baratta & Fenerty, Ltd.,
When an attorney has a basis to believe he has breached a professional duty, he has a reason to foresee that his conduct might be the basis of a professional liability claim against him. He cannot assume that the claim will not be brought because he subjectively believes it is time barred or lacks merit.
Coregis Ins. Co.,
In our view, a reasonable attorney in [the insureds’] position could not have been certain, and thus should not have assumed, that the limitations period had expired as a matter of law. Rather, a reasonable attorney would have foreseen that there might be the basis for a claim because the statute of limitations may have been tolled ... under the discovery rule.
Id.
at 308. Likewise, the New York Court of Appeals observed when applying the оbjective prong to language in an insurance contract similar to Twin City’s that the insured need not actually be liable, saying, “the prior knowledge exclusion in this case does not require the known-of act, error, omission or circumstance to be wrongful conduct on the part of the insured.”
Exec. Risk Indem. Inc. v. Pepper Hamilton LLP,
Cohen-Esrey cites several cases in which the insurer unsuccessfully sought to invoke a prior-knowledge provision to preclude coverage. But we do not find them persuasive. All but one are unhelpful because the court did not apply the subjective-objective test adopted in Kansas or because the policy required a greater likelihood of a claim being brought than did the Twin City policy, which required only reasonable foreseeability that a claim
Cohen-Esrey may have had a plausible defense to a claim, but it was not one that was particularly likely to deter a victim from suing. We therefore hold that the prior-knowledge condition barred coverage under the Twin City policy. Twin City was entitled to summary judgment because no reasonable person could find, on this record, that the condition precedent was satisfied. 3
III. CONCLUSION
We AFFIRM the district court’s judgment.
Notes
. Cohen-Esrey also brought claims against Hartford. Hartford won at trial, but CohenEsrey’s appellate briefs do not challenge the judgment in Hartford’s favor.
. The application asked whether there were "any facts, circumstances or situations involving the Applicant ... which could reasonably be expected to give rise to a claim."
Cahow,
. Cohen-Esrey implies in its opening brief that Twin City had received some sort of preinception-date constructive notice of the circumstances of Phillips’s embezzlement through the notice filed by Cohen-Esrey with Nutmeg. But Cohen-Esrey did not make this argument in district court, and the argument is therefore forfeited on appeal.
See Tele-Communications, Inc. v. Comm’r,
Also, Cohen-Esrey argues in its reply brief that HJS’s claim was not reasonably foreseeable at the time of the Twin City policy’s inception because Cohen-Esrey had not yet conducted a full investigation into the effect of Phillips’s scheme and therefore did not know that HJS had actually suffered any losses. This argument comes too late. "This court does not ordinarily review issues raised for the first time in a reply brief."
Stump v. Gates,