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In re Centrix Financial, LLC

United States District Court, D. Colorado

June 2, 2015

In re CENTRIX FINANCIAL, LLC, et al.,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, and AIG DOMESTIC CLAIMS, INC., Defendants. CENTRIX FINANCIAL LIQUIDATING TRUST, and JEFFREY A. WEINMAN in his capacity as Trustee for the Centrix Financial Liquidating Trust, Plaintiffs,

ORDER

PHILIP A. BRIMMER United States District Judge

This matter is before the Court on the Consolidated Motions in Limine [Docket No. 106] filed by defendants National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) and AIG Domestic Claims, Inc. (collectively, “defendants”).[1]

I. BACKGROUND

On March 13, 2009, plaintiffs Centrix Financial Liquidating Trust and Jeffrey A. Weinman (collectively, “Centrix”) filed an adversary complaint against defendants in the Bankruptcy Court for the District of Colorado, alleging that defendants breached their obligation under a Fidelity Bond (the “fidelity bond” or “the bond”) issued by National Union to insure Centrix against fraudulent actions by Centrix officers and employees. Docket No. 1 at 41-44, ¶¶ 89-105; see generally Bankruptcy Case No. 09-01150-EEB. Centrix alleges that it suffered losses that are covered under the fidelity bond. Specifically, Centrix alleges that, from approximately 2002 to 2006, five former officers of Centrix Financial, LLC, Robert Sutton, John Schreven, Roland Anderson, Gerald Fitzgerald, and Howard Klemmer, fraudulently diverted “at least $83, 000, 000” from Centrix, Docket No. 1 at 22, ¶ 2, that the losses were covered by the fidelity bond, id. at 42, ¶ 93, and that defendants have refused to satisfy their obligations under the bond. Id. at 41, ¶ 87. Centrix brings claims for breach of contract, declaratory judgment, and specific performance. See generally id.

National Union asserts two defenses relevant to this Order. First, National Union asserts that Centrix failed to provide notice to National Union within 60 days of discovery of its alleged losses, as required by the bond. See Docket No. 95 at 12. Second, National Union asserts that Centrix discovered its alleged losses before the bond period and therefore the bond does not cover such losses. Id. This defense is based in part on a 2006 lawsuit filed by a Centrix shareholder named Douglas Burke for fraud and mismanagement, which National Union argues raised many of the same allegations that Centrix now claims as bases for its losses under the bond. See id.; see also Docket No. 106 at 8. In opposing defendants’ motion for summary judgment in the bankruptcy court, Centrix argued that, to the extent that the Burke lawsuit placed it on notice of its claims under the fidelity bond, it provided timely notice of that lawsuit to AIG, and AIG was therefore on constructive notice of Centrix’s claims under the fidelity bond. See Bankruptcy Case No. 09-01150-EEB (Docket No. 95 at 25, 64).

II. ANALYSIS

A. Evidence Concerning Whether Untimely Notice Prejudiced National Union

Defendants’ first motion in limine seeks to exclude all evidence and argument regarding whether defendants suffered prejudice due to Centrix’s purported failure to provide National Union timely notice of its claim. Docket No. 106 at 2-4.[2] The fidelity bond, which is labeled a Financial Institution Bond, states that, “[a]t the earliest practicable moment, not to exceed [60][3] days, after discovery of loss, [Centrix] shall give [National Union] notice thereof.” Docket No. 106-1 at 15. The bond “applies to loss discovered by the insured during the Bond Period.” Id. at 13. The bond terminates “immediately upon expiration of the Bond Period.” Id. at 18.[4] Regarding when a loss is discovered, the bond provides that

[d]iscovery occurs when the Insured first becomes aware of facts which would cause a reasonable person to assume that a loss of a type covered by this bond has been or will be incurred, regardless of when the act of [sic] acts causing or contributing to such loss occurred, even though the exact amount of details of loss may not then be known. Discovery also occurs when the Insured receives notice of an actual or potential claim in which it is alleged that the Insured is liable to a third party under circumstances which, if true, would constitute a loss under this bond.

Id. at 13-14.

At issue is whether the so-called “notice-prejudice” rule applies to fidelity bonds. The notice-prejudice rule provides that, if an insured’s notice of its claim to an insurer is unreasonably delayed, the insurer “may only deny benefits if it can prove by a preponderance of the evidence that it was prejudiced by the delay.” Clementi v. Nationwide Mut. Fire Ins. Co., 16 P.3d 223, 232 (Colo. 2001). Colorado adopted the notice-prejudice rule in 2001 in a case involving an uninsured motorist policy. See Id . The Clementi court cited three policy justifications for adopting the rule: “(1) the adhesive nature of insurance contracts, (2) the public policy objective of compensating tort victims, and (3) the inequity of the insurer receiving a windfall due to a technicality.” Id. at 229. The Colorado Supreme Court subsequently applied the notice-prejudice rule in the context of an “occurrence” liability policy. See Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005). The court has recently held, however, that the notice-prejudice rule does not apply to a date-certain notice requirement in a “claims-made” liability policy. See Craft v. Philadelphia Indem. Ins. Co., 343 P.3d 951, 957-58 (Colo. 2015).[5]

Centrix argues that defendants’ motion should be denied because the fidelity bond is an occurrence policy rather than a claims-made policy. Docket No. 112 at 5-6.[6] National Union responds that, while the bond is not identical to a claims-made liability policy, it is “akin to a claims-made policy for purposes of the notice/prejudice rule.” Docket No. 115 at 4 (defendants’ emphasis removed).

The Court looks to the Colorado Supreme Court’s discussion of the notice provisions in Clementi, Friedland, and Craft to determine whether Colorado would extend the notice-prejudice rule to the notice provision in this case. In Clementi, the uninsured motorist policy at issue required the insured to “submit written proof of the claim . . . as soon as practicable.” Clementi, 16 P.3d at 226. Similarly, in Friedland, the liability policy required that “written notice containing particulars sufficient to identify the Insured and also reasonably obtainable information with respect to the time, place and circumstances of the occurrence, and the names and addresses of the injured and of available witnesses, shall be given . . . as soon as practicable.” Friedland, 105 P.3d at 642. In Craft, the claims-made policy required notice “‘as soon as practicable’” but “‘not later than 60 days’ after the expiration of the policy.” Craft, 343 P.3d at 953. Here, the bond required Centrix to provide notice to National Union “[a]t the earliest practicable moment, not to exceed [60][7] days, after discovery of loss.” Docket No. 106-1 at 15.

As noted by the Colorado Supreme Court in Craft, the key difference between occurrence and claims-made liability policies is that the former requires notice of an occurrence “as soon as practicable, ” while claims-made policies typically have a “date-certain notice requirement[].” Craft, 343 P.3d at 960-61. As discussed in Craft, claims-made policies arose in the 1970s in response to the difficulties that underwriters faced writing professional malpractice insurance policies. Craft, 343 P.3d at 957-58. Claims-made policies were designed such that “the risk to the insurer passes when the policy period expires, ” which led to more predictable rate structures. Id. at 958. Whereas the prompt notice requirements in occurrence policies exist so that an insurer is not deprived of the ability to investigate and defend a claim, the date-certain notice requirement in a claims-made policy “defines the temporal boundaries of the policy’s basic coverage terms, ” id., and is therefore “a material condition precedent to coverage.” Id ...


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