NOT RECOMMENDED F OR F ULL-TEXT PUBLICATION F ile Nam e: 13a0504n.06 No. 12-2511 UNITED STAT ES COURT OF AP P EALS F OR THE S IXTH CIRCUIT AMIENTERTAI

NMENT NET WORK, I NC., Plaintiff-Appellant,

v. Z URI CH AMERI CAN I

NSURANCE CO., Def endant- Appellee

. ) ) ) ) ) ) ) ) ) ) ON APPEALFROM THE U NI TED STATES DI STRI CT COURT FOR THE EASTERN DI STRI CT OF MI CHI GAN

Be fore : MARTI

N and SUTTON , Circuit J udg es; ADAMS, District J udg e. * SUTTON, Circuit J udg e. I n this insurance case , a diversity suit g overne d by Michig an law, AMI Entertainment Networ k ch a ll e n g es the district court’s g rant of summary judgme nt to its insurer, Z urich Ame rica

n I nsuranc e. We af

firm. I

. I n J uly 2010, AMI was sued by a company called RDI in Oakland Circuit Court. The lawsuit alleg ed that AMI falsely claimed that RDI did not own a valid license t o d i s t ri b u t e t he Michig an Superstar video poker g ame. Be tween J uly 2010 and November 2011, AMI defe nded itself from the lawsuit, filing sever al motions and eventua lly removing the lawsuit to fede ral court. I n the proce ss, AMI ran up more than $1.3 milli on in leg al fee s . For rea sons of its own, AMI did not notify its insurer, Z urich, a

bout the lawsuit until November 2011.

The Honor able John R. Adams, United St ates District Judge f or the Nor

thern District of * Ohio, sitti ng by

desig nation.No. 12-2511

AMI Entm’ t Network, Inc. v. Zurich Am. I ns. Co. When Z urich rece ived word of t he lawsuit, it informed AMI that, go i n g fo rw ard, it would provide a defe nse under the terms of AMI ’s policy

. At the same time, it ref used to pay the leg al bills AMI had alre ady incurre d in view of the prompt-notice and expense-per mission require ments of the insurance policy

. AMI filed this lawsuit in response , alleg ing that Z urich had brea ched its duty of defe nse by ref using to pay for the leg al bills AMI incurre d befor e November 2011. The district court g rante d summary judgme nt to Zur ich. I I

. This appea l prese nts one question: Must Z urich pay the defe nse costs AMI incurre d befor e it told Z urich about the underly i n g l i t i gat i o n? The answe r is no, as the district court corr ectly

rec og nized.

Start with the lang uag e of the insurance contra ct. The policy obliga ted AMI to notify Z urich “promptly of any

. . . suit,” and g ave Z urich “ the rig ht to appoint defense counsel.” R. 14-2 at 15, § I .D.3; see also id

. at 55 (re quiring AMI to notify Z urich “as soon as prac ticable” in the event of a lawsuit ag ainst AMI ). The policy added that “[n] o insured will, except at that insured’s own costs, voluntarily m ak e an y pay ment, assume any obliga tion, or incur any expense . . . without our consent.” R. 1 4 -3 at 1 1 , § I V.2.d. The policy confirme d that “[c]ompl iance with the repor ting require ments
. . . is a condition prec edent to cover ag e.” R. 14-2 at 15, § I

. D. 4

. An d the policy established t h at , i f AM I failed to comply , Z urich would “not be require d to establish prejudice resulting from the noncompliance , but [would] be automatically relieve d of liability with respe ct to

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AMI Entm’ t Network, Inc. v. Zurich Am. I ns. Co. the claim.” Id

. When all is said and done, the lang uag e of th e policy square ly supports Z urich’s decision n o t to pay for defe nse expenses incurre d befor e AMI told Z urich about the underly ing lawsuit and incurr ed without Z urich’s pe rmission.

I n addition to being s u p p o rt ed by the lang uag e of the policy , Z urich’s position also is supported by backg round principles of Michig an insurance law. The policy g ave Z urich the duty to defe nd AMI ag ainst any lawsuit that potentially fell within the ambit of the policy

. That duty beg an

as soon as a lawsuit was filed ag ainst AMI

. Am. Bumper & Mfg. Co. v. Hartford Fire Ins. Co. , 550 N.W.2d 475, 481 (Mich. 1996). An insurer cannot, howeve r, brea ch that duty befor e it knows about

a lawsuit. Aetna Cas. & Sur. Co. v. Dow Chemical Co. , 44 F. Supp. 2d 847, 859 (E.D. Mich. 1997); Century Indem

. Co. v. Aero-M otive Co. , 318 F. Supp. 2d 530, 544 (W.D. Mich. 2003), aff’d , 155 F. App’x 833 (6th Cir. 2005) (citing Dow Chem. Co. for the same). Be fore an insurer knows about a lawsuit, it has no chanc e to mount (or to ref use to mount) a defe nse for its insured, and insurers are not sentries who must marc h “bac k and forth to the court house to keep a chec k on if or when [t heir insured] may be serve d with proce ss.” Koski v. Allstate Ins. Co. , 572 N.W.2d 636, 640 (Mich. 1998) (quoting W

eave r v. Hartford Acc

. & Indem

. Co. , 570 S.W .2d 367, 369 (Tex. 1978)). AMI does not dispute that Z urich did not know about the RDI lawsuit until November 2011. Be fore then, Z urich could not have brea ched any duty to defe nd, and in the absenc e of a brea ch Z urich cannot be liable for AMI ’s def

ense c osts.

AMI offe rs sever al re s p o n ses, all unconvincing

. I t first claims that Z urich must establish prejudice from the absenc e o f notice and permission, notwithstanding the term of the parties’ - 3 -No. 12-2511

AMI Entm’ t Network, Inc. v. Zurich Am. I ns. Co. ag ree ment that disclaimed any need to show prejudice

. Call us skeptical. Some Michig an case s to be sure sug g est that Michig an public policy prohibits a party from re fusing to indemnify based on

a failure to n o t i fy t h e insurance company in a timely manner in the absenc e of prejudice to the insurance company . See, e.g. , Koski , 5 7 2 N.W .2d at 639; W endel v. Swanberg , 185 N.W.2d 348, 353 (Mich. 1971). But AMI has not pointed us to an expense-only case in which this public policy prohibits the insurance company from enfor cing a contra ctual p ro v i sion that rea sonably require s notice and pe rmission before the insured may char g e def

ense c osts to the insurance c ompany .
Be that as it may , we need not r esolve this point of Michig an law today

. The rea lity is tha t Z urich can show prejudice in any event. For six teen months, all conce de, Z urich did not know about the lawsuit. And for six teen months, AMI assumed control of the defe nse of the RDI lawsuit without Z urich’s knowledg e, depriving Z urich of the opportunity to ma nag e the litigation eff

iciently or for that matter settle it. See Koski , 572 N.W.2d at 639 (holding that an insurer suffe red prejudice when, among other things, it was “depr ived of any opportunity to eng ag e in discovery ”); W ehner v. Foster , 49 N.W.2d 87, 91 (Mich. 1951) (finding prejudice when a seven- month de lay in r eporting a cla im g ave the insurer no opportunity to i n spect damag ed proper ty or interview witnesses); see also Guaranty Bank v. Chubb Corp. , 538 F.3d 587, 591 (7th Cir. 2008) (finding that “incr easing the cost of defe nding the suit” prejudice d an insurer) ; Integon Nat’l Ins. Co. v. Berry , No. 289320, 2010 WL 1138023, at *4 (Mich. Ct. App. Mar. 25, 2010) (explaining that an insurer suffe red prejudice when it was “depr ived of not i ce and the opportunity to defe nd”). On top of these g ener al indicators of prejudice , there is another purpose of an expense-per mission clause : approving the rate s of outside

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AMI Entm’ t Network, Inc. v. Zurich Am. I ns. Co. counsel. I n this instance, AMI paid the partne rs of its outside law firm $250 per hour, while Z urich permitt ed p ar tners at outside law firms a maxi mum of $150 per hour. See Morrow Aff., R. 16-7 ¶ 12. Simil ar dispar ities ex isted betwee n the ra tes paid by

AMIfor the w ork of associate s and the rate s allowed by Z urich. Id. Allowing AMI to r ecove r pre- notice and pre- permission costs would
t ra n s fo rm the i nsurer ’s dut y to defe nd into “a duty to reimburse , without aff ording the i nsurer the opportunity to control the defe nse and settlement of the underly ing obliga tion.” Century Indem

. Co. , 318 F. Supp. 2d at 544.

Nor did a potential conflict of interest b et we en AMI and Z urich—a rising from the intentional-tort exemption i n the policy —g ive AMI

the rig ht to control the defe nse without notice to Z urich and without permission from Z urich for th e ex penses AMI incurre d. Many liability insurance policies, including this one, exempt intentional torts from their cover ag e. And in this instance, RDI broug ht a series of claims ag ainst AMI , one of which mi g ht or m ight not be treated

as an intentional tort. I n that kind of a settin g, i f t h e insurer “has asser ted cover ag e defe nses that raise the same issues raised by the plaintiff in the underly ing action ag ainst the insured,” the insured need not cede the lawsuit’s defe nse to its insurer, and the insurer rema ins liable for the costs. Dow Chemical Co. , 44 F. Supp. 2d at 860.

But to invoke this kind of a conflict to reta in control of the defe nse, AMI had to do something it did not: g ive notice to the insurer. An insurer cannot arg ue that a lawsuit falls outside the policy ’s scope if the insurer does not know of the lawsuit at all. That is why Dow Chemical ref used to g rant summary judgme nt when there was a fac tual question about “whe n, if at all,” the insurer was “made - 5 -No. 12-2511

AMI Entm’ t Network, Inc. v. Zurich Am. I ns. Co.

awa re of an underly ing claim and [t he insured’ s] need for a defe nse.” Id . at 861. No such dispute clouds the resolution of this case . AMI does not contend that Z urich knew about the lawsuit befor e AMI provided notice in November 2011. Perhaps, as AMI claims, a conflict beg an afte r Z urich raised sever al potential defe nses in Dec ember 2011. That quest i o n is the subject of a separ ate lawsuit over post-notice defe nse costs still pending in the district court. See Complaint ¶¶ 17–20, A MI Entm’t Network, Inc. v. Zurich Am. Ins. Co. , No. 4:12-cv-15212- GAD- L J M, ECF #1 (E.D. Mich. Nov. 27, 2012). But even if such a conflict exis ted, it had no bear ing on Z urich’s liability for money AMI spent before it notified Z urich. As the district court corr ectly conclude d, AMI alone bear s responsibility

for those c osts.

I I I

.
For these re asons, we a ffirm.

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