Fifth Circuit Holds Direct Action Barred By Insured’s Untimely Claim Reporting

In its recent decision in First Am. Title Ins. Co. v. Cont'l Cas. Co., 2013 U.S. App. LEXIS 4153 (5^th Cir. Feb. 28, 2013), the United States Court of Appeals, applying Louisiana law, had occasion to consider whether an insured’s failure to report a malpractice claim prior to its policy’s expiration precluded the underlying plaintiff’s right to bring a direct action against the insurer.

Continental Casualty Company insured Titan Title, LLC under a claims made and reported legal malpractice policy in effect for the period August 16, 2008 to August 16, 2009.  During the policy period, Titan, and its principal, were named as defendants in a lawsuit alleging they were negligent in issuing title insurance policies on behalf of its client, plaintiff First American Title Insurance Company.  The insureds, however, failed to report the lawsuit to Continental while the malpractice policy was in effect.  First American subsequently learned of the policy and gave notice of the claim to Continental in January 2010.  It later amended its complaint to add Continental as a direct defendant pursuant to Louisiana’s Direct Action Statute. 

The lower court granted Continental’s motion for summary judgment, concluding that First American could not recover under the policy since neither the insureds, nor First American, reported the claim to Continental during the policy period.  In reaching its decision, the lower court reasoned that if the plaintiff could subvert the policy’s claims made and reporting requirement, then the policy would improperly be transformed into an occurrence policy, which would negate the bargained-for-exchange between Continental and its insured.  On appeal, the Fifth Circuit acknowledged the lack of Louisiana state court guidance on the issue, requiring an “Erie guess” on the issue.  The court concluded that the district court properly predicted how a Louisiana court would rule, since Louisiana state courts have held in other contexts that the Direct Action Statute does not alter the scope of coverage under an insurance policy, and that it does not give plaintiffs greater policy rights than enjoyed by insureds.  See, e.g., Anderson v. Ichinose, 760 So. 2d 302 (La. 1999); Robicheaux v. Adly, 779 So. 2d 1048(La. Ct. App. 3d Cir. 2001). 

With this in mind, and given Louisiana’s rigid enforcement of claims made and reporting policy requirements, the court concluded that the failure of the insured to report the claim while the policy was in effect was binding on First American’s right to insurance benefits.  In this connection, the court cited to its earlier decision in Resolution Trust Corp. v. Ayo, 31 F.3d 285 (5th Cir. 1994), noting that “[w]hile the absence of prejudice-preventing notice generally does not bar a third-party action under the Direct Action Statute, the absence of claim-triggering reporting can prevent such an action because relaxing this reporting requirement expands coverage, which ‘constitutes prejudice as a matter of law.” 

In reaching its decision, the court considered First American’s argument that failure to report a claim during the policy period should be considered in the same light as late notice of occurrence or suit under an occurrence policy, which Louisiana courts have held does not operate to the detriment of injured third-parties.  The court rejected this reasoning, drawing a clear distinction between occurrence-based policies and claims made and reported policies:

Unlike occurrence policies, where a third party's claim vests at the time of the injury or occurrence … a claims-made-and-reported policy establishes certain conditions precedent to coverage…Claim-triggering reporting is one of these conditions. By serving as a required element for establishing a claim under a claims-made-and-reported policy's insuring clause, claim-triggering reporting "allow[s] the insurer to 'close its books' on a policy at its expiration and therefore 'attain a level of predictability unattainable under standard occurrence policies.'" … In exchange for the assurance that it will be liable for only those claims that are made and reported to it during the policy's effective term, an insurer may make certain concessions, such as accepting a lower policy premium. In light of the delicate balance in these policies, we strictly construe notice and reporting requirements in claims-made policies because of their important role in defining the scope of different in scope of temporal coverage.

First American’s argument, concluded the court, would improperly expand the policy’s scope of coverage, and the bargained-for-exchange between Continental and its insured.  As such, the Fifth Circuit concurred with the lower court’s reasoning that allowing First American to recover under the policy under such circumstances would effectively transform the policy from a claims-made policy into an occurrence-based policy.