Fed. IL, Late Notice / Choice of Law

NHL Trademark Case – 16-Month Delay Untimely Despite Insurer Paying 1/3 Defense Expenses – Waiver Must be Intentional

The District Court for the Northern District of Illinois, in an opinion written by Judge Elaine E. Bucklo, applying New York law, ruled that an insurance company is not obligated to pay the remaining two-thirds of its insured’s defense costs in an underlying action because the insureds failed to provide timely notice, despite the fact that the same insurer already paid one-third of the  defense costs. 

Frankenmuth Mutual Insurance Company (“Frankenmuth”) sought a declaration regarding its duty to defend The Hockey Cup, LLC, A&R Collectibles, Inc. and Roger Dewey under a Businessowners Policy in a lawsuit filed by the National Hockey League and NHL Enterprises LP (the “NHL Suit”).  Ultimately, the NHL Suit settled. Frankenmuth paid the entire settlement and also paid one-third of the reasonable defense costs. The parties filed cross motions for summary judgment regarding whether Frankenmuth owed the remaining two-thirds of the defendants’ defense costs.  

The parties disputed whether Illinois or New York law applied.  Based on Illinois choice of law principles, the court examined the issue using Illinois’ “most significant contacts” test.  The court noted that the location of the insured risk is given special emphasis. Here, the liability arose in New York because the NHL Suit (1) was filed in New York; (2)  was filed by entities headquartered in New York; (3) asserted claims under New York law; and (4) challenged the defendants’ use of the NHL’s intellectual property in marketing and sales conducting in New York and elsewhere.  

As to whether notice was timely, the insureds argued that they had no knowledge of the NHL’s claims until July 27, 2018, when served with the complaint in the NHL Suit.  They further argued that even if notice was late, Frankenmuth could not deny coverage on that basis because it had not shown prejudice. Moreover, according to the defendants Frankenmuth disclaimed late notice by defending in the NHL Suit and not asserting late notice as a coverage defense prior to the filing of the coverage dispute.  

Under New York law, “compliance with the notice provision of an insurance contract is a condition precedent to all of the insurer’s duties and liability under the policy, ‘including the duty to defend.’”  The Frankenmuth policy required its insureds to notify it “as soon as practicable” of “an offense which may result in a claim,” or if “a claim is made or ‘suit’ is brought against any insured.” Under New York law, an insured’s “obligation to provide notice of an occurrence or offense is triggered by the insured’s knowledge of events and circumstances which would suggest the possibility of a claim, not the actuality of a claim.” 

Frankenmuth argued the insureds knew of the trademark claims asserted in the NHL Suit at least by July 2016 and learned of counterfeiting claims in March 2017, when the NHL Suit plaintiffs sent cease-and-desist letters.  Yet, the insureds did not notify Frankenmuth until August 6, 2018. The court found that at the very least the March 2017 cease-and-desist letters triggered the insureds’ notice obligations under the policy. According to the court, the insureds’ delay of sixteen months was unreasonable.    

The court  found that Frankenmuth was not required to show prejudice because the New York statute that requires the insurer establish prejudice only applies to polices issued or delivered in New York, and there was no dispute that the policy at issue in the case was issued and delivered in Illinois.  

According to the court, the insureds’ final argument – that Frankenmuth disclaimed late notice as a basis for denying coverage by not raising the defense sooner – was “a closer call.”  However, the court disagreed. It ruled that Frankenmuth did not “disclaim” its late notice coverage defense, because Frankenmuth reserved “all of its rights, remedies, and defenses” under the policy throughout its communications with the insureds, and the insureds did not establish when Frankenmuth actually became aware of the 2017 cease-and-desist letters.  Thus, the insureds did not establish that Frankenmuth intentionally waived its late-notice defense. The insureds failed to satisfy the notice provision under the policy, and therefore, Frankenmuth did not have an obligation to the insureds for the remainder two-thirds of defense costs. Frankenmuth Mut. Ins. Co. v. The Hockey Cup, LLC, No. 18 C 8142 (N.D. Ill. Sept. 20, 2019).