South Carolina Court Rejects Theory of Seamless Claims Made and Reported Coverage

In its recent decision in GS2 Engineering & Environmental Consultants, Inc. v. Zurich American Ins. Co., 2013 U.S. Dist. LEXIS 95137 (D.S.C. July 9, 2013), the United State District Court for South Carolina had occasion to consider the limitations of coverage inherent in a claims made and reported policy.

Steadfast Insurance Company insured GS2 under a series of claims made and reported contractors’ pollution liability policies.  At issue were the policies in effect for the periods August 7, 2009 to August 7, 2010 and August 7, 2010 to August 7, 2011.  The policies were similar in all material respects.  The policies’ insuring agreements stated plainly that coverage was available only for claims first made during the policy period and reported to the insurer during the policy period or an extended reporting period, if applicable.  The policies provided for an automatic thirty day extended reporting period, and the option to provide a lengthier extended reporting period, upon termination of the policy, defined as “all theories of liability (direct or vicarious) asserted against any insured.”  In August 2010, while the 09-10 policy was in effect, GS2 was served with a complaint.  It failed to report the complaint to Steadfast prior to the August 7, 2010 expiration of its policy.  It was not until September 23, 2010 – nearly six weeks into the 10-11 policy period – that the underlying claimant gave notice of the matter to Steadfast.  GS2 only later gave formal notice of the suit to Steadfast in November 2010. 

In the ensuing coverage litigation, Steadfast argued that because there was no termination of coverage, i.e., because the 09-10 policy was renewed for the 10-11 policy period, there was no extended reporting period tacked onto the 09-10 policy.  As such, GS2’s failure to have reported the underlying suit to Steadfast prior to August 7, 2010 was fatal to its right to coverage.  GS2, however, argued that the renewal of the 09-10 policy should have the effect of extending the reporting period, relying on the Ohio and Kentucky decisions in Helberg v. Nat'l Union Fire Ins. Co., 657 N.E.2d 832 (Ohio 1995) and AIG Domestic Claims, Inc. v. Tussey, 2010 Ky. App. Unpub. LEXIS 741 (Ky. Ct. App. 2010), where the respective courts adopted a theory of seamless or continuous coverage, i.e., that the reporting period in a claims made and reported policy is extended if the policy is renewed.

Relying on what it deemed the majority rule, as demonstrated in decisions such as Checkrite Ltd., Inc. v. Illinois Nat. Ins. Co., 95 F. Supp. 2d 180 (S.D.N.Y. 2000) and Ehrgood v. Coregis Ins. Co., 59 F. Supp. 2d 438 (M.D. Pa. 1998), the District Court of South Carolina rejected GS2’s theory of continuous coverage, finding that the majority rule “better reflect the nature of the policies at issue and their actual language.”  The court further predicted that:

… the South Carolina Supreme Court would apply this reasoning to exclude coverage under the facts of this case and language of the present policy, which clearly and repeatedly advises that coverage requires a claim to be made and reported during the same policy period. Any ambiguity which might be found in the ERP, when read in isolation, is clarified by the language found in the introductory and basic coverage provisions quoted above. The policy even alerts the insured that such terms "may be different from other policies an 'insured' may have purchased."