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Decided: April 14, 2016

The Fourth Circuit affirmed the district court’s ruling.

In June 2008, Amiel Cueto sued American Bank and ten other defendants alleging that they fraudulently failed to fund his $8 million sale of real property, causing the deal to collapse.  American Bank asserted the suit was frivolous because it had nothing to do with the Illinois transaction; it is based in Maryland.  The complaint and summons were served on American Bank’s agent, CT Corporation on June 18, 2008.  The papers were transmitted to American Bank’s CFO; however, the CFO had left the employment of American Bank.  In late July 2008, an American Bank subsidiary discovered the papers and forwarded them to American Bank’s local lawyer but the lawyer claimed to never receive them.  Cueto obtained a default judgment for a total of $98,544,734.65 after American Bank failed to respond.  American Bank received the court papers when Cueto began his efforts to collect on the default judgment a mere six months later.  American Bank’s insurance broker notified St. Paul Insurance in February 2009.  American Bank’s general counsel called St. Paul Insurance’s claims counsel to see if American Bank would be covered for this incident and the claims counsel replied “yes.”  However, the claims counsel prepared documents stating that St. Paul reserved the right to deny coverage due to late notice.  On April 15, 2009, St. Paul Insurance denied coverage due to a lack of timely notice.

American Bank retained counsel in St. Louis, Missouri and then in Chicago to appeal the default judgment.  American Bank retained these counsels to have the default judgment overturned instead of accepting Cueto’s settlement before notifying St. Paul Insurance of the lawsuit.  The Illinois state appellate court vacated the default judgment and dismissed the Cueto suit.  The appeal cost American Bank $1.8 million in legal fees.  St. Paul Insurance commenced this action for a declaratory judgment that it had no duty to provide coverage to American Bank because of untimely notice.  In an amended complaint, St. Paul Insurance stated that American Bank breached its duty under the policy to defend the suit upon being served.  American Bank advanced theories on waiver and estoppel.  The district court granted St. Paul Insurance’s summary judgment motion and denied American Bank’s motion, concluding that American Bank breached its duty by providing late notice and St. Paul Insurance suffered prejudice as a result.

On appeal, American Bank argued that it provided timely notice to St. Paul Insurance; that it complied with its duty to defend; and that material factual disputes remained with respect to its waiver, estoppel, and bad faith claims.  American Bank stated it provided timely notice because it provided notice when it had actual knowledge of the suit.  However, the policy stated, “the requirement to give notice is triggered not by ‘actual knowledge’ or a claim, but by ‘service of a complaint’ upon the insured.”  Therefore, American Bank’s duty to notify St. Paul Insurance was triggered when it’s agent was served with the papers.  The Court noted, “internal ‘corporate screw-ups’ provide no basis to excuse American Bank’s failure to give St. Paul Insurance timely notice of the Cueto suit after being validly served with process.”  American Bank’s notice was not timely because it notified St. Paul Insurance eight months after being served, this was not “as soon as practicable.”  The Court stated the untimely notice prejudiced St. Paul Insurance because it “denied St. Paul Insurance the opportunity to participate in the selection of counsel, to speak with counsel, and to discuss credible defense strategies for dismissing Cueto’s suit before the default judgment.”  Therefore, St. Paul Insurance was within its powers when it denied coverage to American Bank for the Cueto suit.

Accordingly, the Court affirmed the judgment of the district court.

Full Opinion

Alicia E. Morris