Maryland Court Holds Prejudice Rule Applies to Claims Made and Reported Policy

In its recent decision in Navigators Specialty Ins. Co. v. Med. Benefits Administrators of Maryland, 2014 U.S. Dist. LEXIS 22631 (D. Md. Feb. 21, 2014), the United States District Court for the District of Maryland had occasion to consider whether Maryland Code § 19-110, which establishes a prejudice requirement for late notice disclaimers, applies to claims made and reported policies.

Navigators insured Medical Benefits Administrators of Maryland (“MBA”) under successive claims made and reported professional liability policies for periods October 31, 2009 to October 31, 2010 and October 31, 2010 to October 31, 2011.  MBA was a claims administrator for Brit Insurance with respect to employer benefit plans.  A dispute arose between Brit and MBA concerning funds that MBA allegedly failed to repay or reconcile, and litigation ultimately followed.

While the parties disputed when Brit first asserted its claim against MBA – prior to the first of the two policies or during the term of one of the policies – the court ultimately determined that the claim was first made while the 09-10 Navigators’ policy was in effect.  MBA, however, did not report the claim to Navigators until July 2011.  Navigators thus contended that MBA’s failure to have reported the claim prior to the October 31, 2010 expiration of the 09-10 policy vitiated any right that MBA had to coverage under that policy.  MBA countered that under Maryland law, its failure to have reported the claim while the 09-10 policy was still in effect would only serve as a bar to coverage if Navigators was actually prejudiced as a result.

In support of its assertion, MBA relied on Maryland Code § 19-110, which states:

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured . . . has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.    

While this rule has been applied routinely to occurrence-based policies, the court noted that there were only a handful of Maryland cases that considered it in the context of claims made and reported policies.  In Sherwood Brands, Inc. v. Great Am. Ins. Co., 13 A.3d 1268 (Md. 2011), Maryland’s Supreme Court applied in the rule in the context of a claims-made policy.  Two subsequent Maryland federal district courts distinguished the holding in Sherwood when considering claims made and reported policies.  The court also noted the recent decision in McDowell Bldg., LLC v. Zurich Am. Ins. Co., 2013 U.S. Dist. LEXIS 132854 (D. Md. Sept. 17, 2013), where Maryland’s federal district court applied the rule in the context of a claims made and reported policy.

In considering these cases, the court focused heavily on the reasoning in Sherwood, in particular the Sherwood Court’s determination that the purpose of § 19-110 was to make “policy provisions requiring notice to, and cooperation with, the insurer covenants and not conditions.”  Accordingly, the court agreed that the rule articulated in Sherwood applies to all policies, including claims made and reported policies.  As such, the court determined that Navigators was required to demonstrate actual prejudice, by a preponderance of the evidence, in order to disclaim coverage under the 09-10 policy.

10th Circuit Certifies Late Notice and Reporting Questions to Colorado Supreme Court

In its recent decision in Craft v. Philadelphia Indem. Ins. Co., 2014 U.S. App. LEXIS 2680 (Feb. 11, 2014), the United States Court of Appeals for the Tenth Circuit, applying Colorado law, had occasion to consider whether Colorado’s notice-prejudice rule applies to claims made and reported policies, or is limited to occurrence-based policies.

Philadelphia insured Campbell’s C-Ment Contracting under a directors and officers policy for the period November 2009 to November 2010.  While the policy was in effect, one of the insured’s officers, Craft, was sued for alleged misrepresentations he made in connection with a corporate merger.  Craft, apparently, was unaware of the policy at the time and thus undertook his own defense.  He did not learn of the policy’s existence until March 2012, at which time he tendered his defense.  Craft later settled the underlying suit before Philadelphia issued a formal coverage position.

Craft later sued Philadelphia, seeking reimbursement of defense costs and the settlement amount.  Philadelphia moved to dismiss on the grounds that Craft had failed to comply with the policy’s notice provision, which required notice of claim as soon as practicable, and that he also failed to comply with the policy’s reporting provision, which required that the claim be reported to Philadelphia within sixty days of the policy’s expiration.  Relying on the Colorado Supreme Court decision in Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005), Craft argued that Philadelphia could only sustain its late notice disclaimer if it could demonstrate prejudice as a result of his non-compliance with the notice and reporting provisions.

In considering the issue, the 10^th Circuit noted a clear distinction in Colorado law between claims made and occurrence-based policies.  Whether the Friedland decision applied in both contexts, however, was an issue for which the court could find no guidance.  The court nevertheless observed that if it determined that the notice-prejudice rule applied to claims-made policies, such a decision “would render Colorado law an outlier on this issue,” since the majority of jurisdictions agree that prejudice is not a consideration for claims-made policies.  The court also recognized that applying a prejudice rule to claims-made policies could greatly impact the insurance market in Colorado, since insurers typically can offer claims-made policies at a lower premium precisely because of the limited notice period.  Finally, the court acknowledged that imposing a prejudice requirement on a claims-made policy would, in essence, effect a rewrite of the policy language, something Colorado courts are loathe to do. 

Given these significant concerns, the court certified to the Colorado Supreme Court the question of whether the notice-prejudice rule applies to claims made and reported policies.  The court also certified the related question of whether a prejudice requirement applies to the provision requiring notice of claim as soon as practicable; in other words, claims for which notice is given within the policy period, but still late under the circumstances.

Texas Court Holds Department of Insurance Proceeding Is a “Claim”

In its recent decision in Regency Title Co. v. Westchester Fire Ins. Co., 2013 U.S. Dist. LEXIS 162772 (E.D. Tex. Nov. 15, 2013), the United States District Court for the Eastern District of Texas had occasion to consider the date on which a claim was first made for the purpose of triggering coverage under a professional liability policy.

Westchester insured Regency Title Company (“Regency”) under a claims made and reported errors and omissions policy.  The policy defined the term “claim” to include:

1.   a written demand against any Insured for monetary or non-monetary damages;

4. a civil, administrative, or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order, or similar document.

Subsequent to the policy’s issuance, Regency was named as a defendant in a lawsuit for alleged improper withdrawal of escrow funds in connection with an underlying real estate transaction.  A year prior to filing suit, however, plaintiff in the underlying action filed a complaint with the Texas Department of Insurance (“TDI”).  The TDI complaint involved the same facts as the later filed lawsuit, and it demanded payment of $100,000 or specific performance.  Subsequent to the filing of complaint with the TDI, but prior to the policy’s issuance, the TDI sent a letter to Regency advising of the complaint and of Regency’s opportunity to respond to the complaint.  Regency, in fact, answered the TDI complaint, and nearly a year prior to the inception of the Westchester policy, the TDI completed its investigation, concluding that Regency had not committed a violation of Texas Insurance Code. 

Westchester denied coverage to Regency for the underlying lawsuit on the basis that the claim was first made with the filing of the complaint with the TDI, and that the claim was made prior to the policy’s inception date.  In considering whether Westchester had a duty to defend Regency in the underlying matter, the court likened the “claims made” requirement to an exclusion that must be construed narrowly.  As such, explained the court, if there was any potential that the TDI complaint was not a “claim” as defined by the Westchester policy, then Regency would at the very least be entitled to a defense.

Regency argued that the TDI  complaint did not fall within the first definition of “claim,” of a written demand against any Insured for monetary or non-monetary damages, because the underlying plaintiff filed its complaint with the TDI and did not send any correspondence directly to Regency.   Specifically, Regency argued that “since the complaint was sent to a third party, the complaint does not constitute a ‘demand against an insured.’”  The court rejected this contention, noting that the policy’s first definition of claim only required a written demand “against any Insured,” not a written demand “sent to an insured.”  The court refused to read such an element into the definition of “claim,” finding it to be plain and unambiguous, explaining:

Regency is asking the court to add additional requirements to the definition in the policy. The policy does not indicate that the demand must be made directly to the insured. … The Exhibits indicate that Tower Custom Homes sent TDI a demand for money from Regency … that TDI sent that demand to Regency … that Regency responded directly to the demand … and that TDI sent Regency's response to Tower Custom Homes … .  Tower Custom Homes made a demand against Regency, Regency was informed of the demand, and Tower Custom Homes was informed that Regency was informed of its demand. Had Tower Custom Homes sent the demand to Regency through the U.S. mail with a return receipt requested, the exact same results would have occurred, except that Regency may or may not have sent Tower a response.

The court further observed that even if the TDI complaint did not constitute a written demand made against any insured, then it fell within the fourth definition of “claim” as a civil, administrative or regulatory investigation filed against the insured.  Regency argued that the TDI complaint did not fall within this definition of “claim” because TDI’s actions did not constitute an “investigation” within the meaning of the policy.  Specifically, Regency pointed to a phrase in TDI’s letter to Regency advising that it was “evaluating” whether Regency had committed a violation of the Texas Insurance Code.   Regency also argued that the brevity of TDI’s involvement (its file was closed within a matter of weeks) precluded its evaluation from being considered a formal investigation.  The court rejected this parsing of TDI’s actions, noting that the TDI’s letters made several references to its investigation, and that the duration of its investigation was irrelevant, since “the policy does not indicate that a detailed investigation or an exhaustive investigation must take place, but merely that there is an investigation.”  With this in mind, the court easily concluded that TDI’s actions came within the definition of “claim,” explaining:

…  TDI's actions are consistent with an investigation. TDI sent a letter to Regency asking specifically for information from Regency and that Regency supply TDI with "supporting documentation". … TDI was attempting to obtain information from Regency. Such an action could naturally be considered the first step in a "systematic examination", which is one definition for "investigation" that Regency has put forward. … Moreover, the very fact that TDI found no violation of the Texas insurance laws indicates that TDI must have conducted some type of investigation in order to make such a finding.

Accordingly, the court agreed that TDI action constituted a “claim,” and that as such, the “claim” against Regency was first made prior to the policy’s inception date.  The court, therefore, granted Westchester’s motion to dismiss, holding that it had no duty to defend or indemnify Regency in connection with the underlying lawsuit.

Michigan Court Holds Notice of Potential Claim Insufficient

In its recent decision in Lemons v. Mikocem, LLC, 2013 U.S. Dist. LEXIS 133976 (E.D. Mich. Sept. 19, 2013), the United States District Court for the Eastern District of Michigan had occasion to consider the issue of whether an insured’s notice of circumstances that could give rise to a claim was sufficient to preserve coverage for a future claim. 

Federal Insurance Company insured Indian Nation and its subsidiaries, including Mikocem, under a directors and officers policy with an employment practices liability coverage part.  Indian Nation and Mikocem operated funeral homes in Michigan and Tennessee.  The policy provided claims made and reported coverage for the period April 20, 2005 through April 20, 2006, but was extended through October 20, 2006.  Federal decided not to renew the policy upon its expiration.  On October 19, 2006, Federal received a letter from Indian Nation accusing Federal not to renewing the policy because of information it had learned in an Internet search; specifically, articles regarding Indian Nation’s alleged investment fraud.  The letter stated that:

Since [Federal] has chosen to non renew [sic] our account please let this serve as notice of an "incident" or "claim" to protect our rights under the policy. At this time no formal demands have been made against the company, however if there are any formal demands they will promptly be forwarded to [Federal] when they are received.

At issue in the Lemons case was coverage for a wrongful termination suit filed in April 2007 by John Lemons against Mikocem.  Lemons obtained a judgment against Mikocem and then sought to enforce that judgment, as a garnishee, against Federal.  On motion for summary judgment, Federal argued that it had no indemnity obligation with respect to Lemons’ judgment against Mikocem because Lemons’ suit was not a claim first made during the policy period.  Lemons argued in response that Indian Nation’s October 19, 2006 letter to Federal was sufficient notice under the policy’s reporting provision, which states:

If during the Policy Period, or any applicable Extended Reporting Period, an Insured becomes aware of a Potential Employment Claim or Potential Third Party Claim which could give rise to any Employment Claim or Third Party Claim (as such terms are defined in the Employment Practices Liability Coverage Section) or becomes aware of circumstances which could give rise to any Claim, other than an Employment Claim or a Third Party Claim (as such terms are defined in the Employment Practices Liability Coverage Section), and gives written notice of such Potential Employment Claim, Potential Third Party Claim or circumstances to the Company as soon as practicable thereafter but before the expiration or cancelation [sic] of this Policy, then any Claim subsequently arising from such Potential Employment Claim, Potential Third Party Claim  or circumstances shall be considered to have been made against the Insured during the Policy Year in which the Potential Employment Claim, Potential Third Party Claim or circumstances were first reported to the Company.

Notably, the policy defined “Potential Employment Claim” as a complaint or allegation of a wrongful act lodged with the insured’s human resources department or functional equivalent thereof. 

Lemons did not contend that Indian Nation’s letter of October 19, 2006 qualified as notice of a Potential Employment Claim.  He nevertheless contended that the policy’s reporting clause permitted notice of three different events: Potential Employment Claims, Potential Third Party Claims, or “circumstances which could give rise to any claim.”  He argued that circumstances reporting serves the purpose of “protect[ing] the insured when the insured is aware of facts (“circumstances”) and their potential affect [sic], but lacks enough detail to draw a legal conclusion as to a particular claim.”  In other words, Lemons argued that the notice provision allowed for reporting of specific types of potential claims (i.e., Potential Employment Claims and Potential Third Party Claims) but that the policy also had a “catch-all” reporting provision that allowed for generic reporting of circumstances that could result in any type of covered claim.

The court rejected Lemons’ reading of the notice provision since it ignored the clause immediately preceding the “notice of circumstances” language that expressly carved out Employment Claims and Third Party Claims (i.e., the clause stating “…other than an Employment Claim or a Third Party Claim.”)  This qualifying clause, explained the court, made clear that the policy only allowed reporting of circumstances for claims other than Employment Claims and Third Party Claims.  As such, concluded the court, notice of circumstances alone was insufficient to preserve coverage for employment claims first made subsequent to the policy’s expiration.  As such, and because the October 19^th letter did not give sufficient details of a Potential Employment Claim, the court agreed that Lemons’ wrongful termination claim could not be considered one first made during the policy period for which coverage was available.

Maryland Court Considers Prejudice in Claims Made and Reported Policy

In its recent decision in McDowell Bldg. v. Zurich Am. Ins. Co., 2013 U.S. Dist. LEXIS 133166 (D. Md. Sept. 17, 2013), the United States District Court for the District of Maryland had occasion to consider Section 19-110 of the Insurance Article of the Maryland Code, and in particular whether this provision imposes a prejudice requirement in claims made and reported policies.

Zurich insured Brasher Design under a series of claims made and reported architects and engineers professional liability policy.  Brasher had been hired by McDowell, a real estate developer, to prepare and file various applications for tax credits for the construction of a building.  Upon learning that Brasher failed to file the applications in a timely fashion, McDowell filed against various entities, including Brasher.  Although suit was filed against Brasher in June 2006, Brasher did not give notice of the matter to Zurich until November 2009.  Zurich subsequently denied coverage under each of its prior policies on the basis that the claim was not first made and reported within the same one year policy period.  McDowell later settled with Brasher and took an assignment of Brasher’s rights under the Zurich policies.  It then filed a declaratory judgment action against Zurich, arguing that Zurich’s denial of coverage was improper since it failed to demonstrate that it was prejudiced as a result of Brasher’s failure to report the claim during the relevant policy period. 

At issue in the McDowell decision was the application of § 19-110 of the Maryland Code, which states:

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.  (Emphasis supplied.)

Zurich argued on motion to dismiss that § 19-110 does not apply to policies under which notice is a condition precedent to coverage, such as claims made and reported policies.   

In considering the issue, the district court examined the history of the statute and the case law it generated, most significantly, the decision by the Maryland Court of Appeals (Maryland’s highest court) in Sherwood Brands, Inc. v. Great American Insurance Co., 13 A.3d 1268 (2011).   The court observed that intention of the statute is to prevent an insured’s forfeiture of coverage based on a technicality, but to also preserve the insurer’s right to void coverage “where the insured's failure to provide notice has undercut the carrier's opportunity to limit its liability.” 

The Sherwood Brands decision, explained the court, considered this rule in the context of a claims-made policy requiring notice as soon as practicable but no later than ninety (90) days after the policy’s expiration.  The Sherwood Brands court held that the statute did, in fact, apply to such a policy, and in doing so, articulated the following rule:

… we hold that § 19-110 does apply, as is the case at present, to claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy's notice provisions. In the latter situation, § 19-110 mandates that notice provisions be treated as covenants, such that failure to abide by them constitutes a breach of the policy sufficient for the statute to require the disclaiming insurer to prove prejudice.

The McDowell court observed case law from the U.S. District Court of Maryland and from the Fourth Circuit calling into question the application of Sherwood Brands in the context of a true claims made and reported policy. Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 852 F.Supp. 2d 647 (D. Md. 2012); Financial Industry Regulatory Authority, Inc. v. Axis Ins. Co., 2013 U.S. Dist. LEXIS 82343 (D. Md. June 12, 2013).  The McDowell court questioned these subsequent decisions in light of the fact that the Sherwood Brands decision expressly applied its holding to any policy in which notice is a condition precedent to coverage, including claims made and reported policies.  As such, the court agreed that while Zurich demonstrated that Brasher’s notice was late, this alone was not sufficient to merit dismissal of McDowell’s lawsuit. The court therefore denied Zurich’s motion so that the issue of prejudice could be further developed.

Illinois Court Addresses Distinction Between Claim and Potential Claim

In its recent decision in Lexington Ins. Co. v. Horace Mann Ins. Co., 2013 U.S. Dist. LEXIS 127544 (N.D. Ill. Sept. 4, 2013), the United States District Court for the Northern District of Illinois had occasion to consider the issue of what constitutes a claim for the purpose of triggering coverage under a professional liability policy.

Lexington insured Horace Mann under an insurance company errors and omissions policy, providing claims made and reported coverage for the period September 28, 2010 to September 28, 2010.  The policy insured Horace Mann for claims arising out of any act, error or omission in its rendering of or failure to render services in connection with its business as an insurer.  Notably, the Lexington policy defined “claim” as “1. a written demand for monetary damages; or 2. a judicial, administrative, arbitration, or other alternative dispute proceeding in which monetary damages are sought.”  The Lexington policy further clarified that “the Corporate Risk Manager, General Counsel's Office, Claims Legal Department of [Horace Mann] shall notify [Lexington] of the setting of a trial, arbitration or mediation date within 60 days of becoming aware of the date.”

The dispute between Horace Mann and Lexington pertained to Horace Mann’s handling of a loss on a non-commercial auto policy it had issued to a Florida insured.  The auto accident happened in May 2008.  In June 2008, counsel for the injured party issued a time limits policy demand to Horace Mann, offering to settle its claim for the policy’s $25,000 limit of liability, but only if Horace Mann accepted the demand within twenty days.  Horace Mann wrote back immediately to advise that it would take the demand under consideration but that it first needed to review the claimant’s medical records.  The claimant thereafter withdrew its demand and filed suit against Horace Mann’s insured in August 2008.  Horace Mann engaged in subsequent efforts to settle the matter, and in 2009 it retained outside counsel to analyze its own potential bad faith exposure.  In a December 2009 email, counsel advised Horace Mann that if settlement were not reached, Horace Mann likely would lose a bad faith case.

In August 2010, the court in the underlying case scheduled a mediation.  In anticipation of the mediation, counsel for the claimant wrote defense counsel in September 14, 2010 – two weeks prior to the inception of the Lexington policy – to discuss a potential bad faith claim against Horace Mann that could result in extracontractual exposure.  The letter specifically warned defense counsel that Horace Mann would need to “open” its policy limits at the mediation if it desired to settle the case.  Plaintiff’s counsel acknowledged in the letter that defense counsel would not be involved in evaluating the bad faith implications present by the claim, but nevertheless urged that Horace Mann be advised that plaintiff intended to explore extracontractual relief at the mediation, and that as such, the letter should be forwarded to Horace Mann for consideration.  The letter was in fact forwarded to Horace Mann on September 20, 2010 – eight days prior to the inception of the Lexington policy. The mediation was held in December 2010 and proved unsuccessful.   Twenty-seven days after the mediation, Horace Mann gave notice of potential claim to Lexington and advised that it was considering a settlement of the underlying claim for an amount up to $1.5 million.  Settlement, however, was not reached prior to a jury awarding the underlying claimant $17 million, which ultimately was compromised for $7 million.

Lexington subsequently denied coverage to Horace Mann on the basis that the claim was not first made during the policy period, but instead was first made long prior to the inception of its policy.   Lexington advanced two arguments in support of this position.  Lexington first contended that the September 14, 2010 letter from plaintiff’s counsel to defense counsel constituted a “a written demand for monetary damages,” and thus fell within its policy’s definition of “claim.”  Specifically, Lexington argued that by using language such as “extracontractual amounts” and “opening” the policy limit, plaintiff’s counsel signaled its intention to seek recovery directly from Horace Mann.  Horace Mann argued in response that the letter at most was notice of a potential claim rather than an actual claim.  The court agreed with Horace Mann, observing that:

[w]hile the letter is in "written" form, it is not addressed to Horace Mann. The letter is from [plaintiff’s] counsel to [defense] counsel. Because the letter was not addressed to Horace Mann, it can hardly be considered a demand on the same. The express policy language covers wrongful acts by Horace Mann, and therefore, requires that the written demand for damages be made upon the insured, Horace Mann, and not a third-party.

That the letter ultimately was forwarded to Horace Mann, prior to the policy’s inception, did not impact the court’s reasoning.  In fact, explained the court, under Florida law, the underlying plaintiff could not assert a direct claim against Horace Mann prior to a verdict or settlement, which as of September 14, 2010, had not yet happened.

Lexington argued in the alternative that the September 14, 2010 letter advising of the mediation satisfied its policy’s second definition of claim; namely, a “a judicial, administrative, arbitration, or other alternative dispute proceeding in which monetary damages are sought.”  While the mediation happened in December 2010, i.e., during the policy period, Lexington argued that the letter advising of the mediation should be considered when the claim was first made.  The court rejected this argument as well, observing that “[a]t most, the letter constitutes notice of mediation, not the "alternative dispute proceeding" itself as defined by the policy language.”  The court again relied on the reasoning that because the letter was written to defense counsel rather than Horace Mann, it could not satisfy the definition of claim.  The court also rejected Lexington’s argument that Horace Mann was required to give notice of the mediation before it occurred.  The court found no support for this position in the policy language.  While the definition of claim required Horace Mann to give notice of a mediation within sixty days, the policy language was silent as to whether this notice must happen before or after the mediation.  As such, and because Horace Mann gave notice of the mediation twenty-seven days after it happened, the court found that Horace Mann satisfied this policy condition.

Massachusetts Court Allows Consideration of Extrinsic Evidence

In its recent decision in BioChemics, Inc. v. AXIS Reinsurance Co., 2013 U.S. Dist. LEXIS 111218 (D. Mass. Aug. 7, 2013), the United States District Court for the District of Massachusetts had occasion to consider when an insurer is entitled to rely on extrinsic evidence for determining its duty to defend.

AXIS insured BioChemics under a claims made and reported directors and officers policy for the period November 13, 2011 to November 13, 2012.  BioChemics sought a defense in connection with an SEC enforcement action filed during the period the policy was in effect.  BioChemics also sought a defense for two SEC subpoenas issued by the SEC during the policy period.  AXIS, however, took the position that BioChemics was not entitled to coverage for these matters because they related back to a series of subpoenas served by the SEC prior to the policy’s date of inception, at a time when BioChemics was insured by a different carrier.   In support of its position, AXIS relied on a provision in its policy’s Limits of Liability section stating that:

All Claims, including all D&O Claims . . . arising from the same Wrongful Act . . . and all Interrelated Wrongful Acts shall be deemed one Claim and such Claim shall be deemed to be first made on the earlier date that: (1) any of the Claims is first made against an Insured under this Policy or any prior policy . . . .

Notably, the subpoenas served by the SEC both prior to and subsequent to the AXIS policy’s date of inception all had the same SEC matter identification and number.

BioChemics filed a declaratory judgment action and subsequently moved for summary judgment on the duty to defend before the commencement of discovery, asserting that the duty to defend is based solely on the complaint and the policy, and that as such, discovery was not necessary.  AXIS opposed the motion, asserting that at the very least, it was entitled to discovery into communications between BioChemics and the SEC so that it could confirm whether, in fact, the subpoenas served prior to its policy’s inception were interrelated with the subsequent subpoenas and the enforcement action, thus comprising a “single, ongoing claim” first made prior to the policy period.

The court acknowledged a line of cases cited by BioChemics standing for the proposition that insurers cannot rely on extrinsic evidence for the purpose of determining a duty to defend.  The court went on to note, however, that this line of cases does not apply to extrinsic facts that will not be litigated in the underlying matter.  The court further observed that in the context of claims made and reported policies, the rule against consideration of extrinsic facts cannot be rigidly applied since coverage issues such as the timing of the claim are unlikely to be alleged in the underlying complaint.  While the court acknowledged it a close question, it ultimately held that:

… an insurer may use extrinsic evidence to deny a duty to defend based on facts irrelevant to the merits of the underlying litigation, such as whether the claim was first made during the policy period, whether the insured party reported the claim to the insurer as required by the policy, or whether the underlying wrongful acts were related to prior wrongful acts.

As such, the court allowed AXIS to proceed with discovery into the interrelatedness issue, and denied BioChemics’ motion for summary judgment without prejudice.  The court further held that under Massachusetts law, AXIS was not required to provide BioChemics with a defense pending determination of the duty to defend issue.

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."

Missouri Court Holds Prejudice Requirement Inapplicable to Claims Made Policy

In its recent decision in Secure Energy v. Phila. Indem. Ins. Co., 2013 U.S. Dist. LEXIS 69320 (E.D.Mo. May 15, 2013), the United States District Court for the Eastern District of Missouri had occasion to consider whether under Missouri law, an insurer need demonstrate prejudice in order to disclaim coverage based on an insured’s failure to report a claim within the time allotted under a claims made policy.

Philadelphia Indemnity insured Secure Energy under successive one-year claims made directors and officers policies during the period October 11, 2007 through October 11, 2012.  The policies contained the following reporting provisions:

In the event that a Claim is made against the Insured, the Insured shall, as a condition precedent to the obligations of the Underwriter under this Policy, give written notice to the Underwriter as soon as practicable after any of the directors, officers, governors, trustees, management committee members, or members of the Board of Members first become aware of such Claim, but, no later than 60 days after the expiration of this Policy, Extension Period, or Run-Off Policy, if applicable.

In December 2007, a claim was asserted against Secure Energy’s board of directors by an individual demanding payment of commissions he claimed he was owed.  Suit was filed in 2008 against one of Secure Energy’s directors, and it was later amended in 2009 to add Secure Energy as a direct defendant.  Secure Energy, however, did not provide notice of the suit to Philadelphia until late 2011.  It claimed that it did not do so earlier because it was unsure that the matter would qualify for coverage.   Philadelphia later denied coverage to Secure Energy, and its directors, based on the failure to report the suit in the time required by the applicable policy.

Secure Energy argued that while it did not strictly comply with the policies’ notice requirements, Missouri law required Philadelphia to demonstrate prejudice in order to disclaim coverage, citing to decisions such as the Missouri Supreme Court’s decision in Weaver v. State Farm Mut. Auto. Ins. Co., 936 S.W.2d 818 (Mo. 1997).  The district court noted, however, that in Wittner, Poger, Rosenblum, & Spewak, P.C. v. Bar Plan Mut. Ins. Co., 969 S.W.2d 749 (Mo. 1998), the Missouri Supreme Court held that the prejudice requirement articulated in Weaver did not extend to claims made policies, but instead was limited to occurrence-based policies.   Observing that several lower state courts and Missouri federal courts recognized the distinction stated in Wittner, the court agreed that Philadelphia need not demonstrate that it was prejudiced as a result of Secure Energy’s failure to have provided notice of the claim in the time required by the applicable policy.

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.

11th Circuit Addresses Late Notice and Related Claims

In its recent decision in Sharp Realty & Mgmt. v. Capitol Specialty Ins. Corp., 2013 U.S. App. LEXIS 243 (11^th Cir. Jan. 4, 2013), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, considered whether an insured’s untimely notice of suit under a professional liability policy vitiated its right to coverage, regardless of prejudiced.  Additionally, the court addressed the concepts of related claims.

The insured, Sharp Realty & Management (“SRM”), was insured under a professional liability policy issued by Allied World Assurance Company (“AWAC”) during the period November 2007 through November 2009, and later under a professional liability policy issued by Capitol Specialty Insurance Corp. (“Capitol”) for the period November 2009 through 2010.   In July 2009, SRM was sued by several parties for its alleged mismanagement of a property.   SRM, however, did not give notice of the suit to AWAC until March 2010 – some eight months later.  SRM also gave notice of the underlying suit to Capitol.  AWAC agreed to provide SRM with a defense under a reservation of rights on several grounds, including SRM’s failure to comply with its policy’s notice provision.  Capitol denied coverage to SRM on the basis that the claim was first made prior to the inception date of its policy.  SRM later brought a declaratory judgment action against AWAC and Capitol in an Alabama federal district court.  Both insurers were successful on motion for summary judgment.

On appeal, the Eleventh Circuit considered first whether SRM’s non-compliance with the notice provision in the AWAC policy precluded its right to coverage.  In considering this issue, the court noted that under Alabama law, the only relevant considerations concerning an insured’s compliance with a notice provision are length of delay and reason for delay.  Under Alabama law, prejudice is not a consideration unless the policy fails to contain a provision making timely notice a condition precedent to coverage.  See, Travelers Indem. Co. of Connecticut v. Miller, 86 So. 3d 338, 342 (Ala. 2011); American Fire & Cas. Co. v. Tankersley, 116 So. 2d 579, 581 (Ala. 1959).   The notice provision in the AWAC policy stated:

B. WHAT TO DO IF AN INSURED HAS A CLAIM

If there is a Claim, or a circumstance or incident likely to result in a Claim, the Insured must promptly do the following:

1.   Notify the Company in writing . . .

2.   Send the Company copies of all . . . legal papers received in connection with the Claim or potential Claim; . . .

C. LEGAL ACTION AGAINST THE COMPANY . . .

2.   No action may be brought against the Company unless the Insured has fully complied with all terms and conditions of this Policy.

SRM argued that this notice provision did not constitute a condition precedent to coverage because it did not contain that phrase, and as such, AWAC need be prejudiced in order to disclaim coverage.  The court disagreed, explaining that the notice provisions “make it clear that SRM was required to promptly notify [AWAC] of any claim before it could bring an action against it.”  As such, the court concluded that the only relevant considerations were the length of SRM’s delay and the reason for its delay.

With respect to the first factor, the court held as a matter of law that SRM’s eight-month delay in giving notice to AWAC was late, observing that in Nationwide Mut. Fire. Ins. Co. v. Estate of Files, 10 So. 3d 533, 536 (Ala. 2008), the Alabama Supreme Court had held that a shorter delay of five months was late as a matter of law.  The court also concluded that SRM could offer no reasonable excuse for its eight-month delay.  While SRM pointed out that it immediately gave a copy of the lawsuit to its attorney, and that its attorney failed to send a copy of the suit to AWAC, the court nevertheless held that the failure of SRM’s attorney was still a delay on SRM’s part and thus not a reasonable excuse for its non-compliance with the policy’s notice provision.  Thus, finding that the length of SRM’s delay in giving notice of suit was too long, and that there was no reasonable excuse for this delay, the court affirmed the lower court’s ruling of summary judgment in AWAC’s favor.

Turning to coverage under Capitol’s policy, the court agreed that the claim was first made in July 2009, prior to the inception date of Capitol policy, and thus did not trigger that policy’s coverage that was limited to claims first made and reported during the policy period.  SRM argued that because the underlying suit was amended during the policy period to include new claims regarding information first learned by plaintiffs during discovery, the amended complaint should be considered a cnew laim first made after the policy’s November 2009 inception date.  The Capitol policy, however, contained a multiple claims provision stating that all claims arising out of the same “erroneous act” would be considered first made on the date the first claim was made against the insured.    Additionally, the Capitol policy contained a related acts provision stating that all erroneous acts that are “logically or causally connected by common facts, circumstances, transactions, events and/or decision” would be considered a single erroneous act.  The court agreed that the new erroneous acts alleged in the amended complaint related to those initially pled, explaining:

All of the claims in the underlying action are based on related Erroneous Acts. The same claimant sued the same defendant for the same type of wrongdoing (failure to collect rent and maintenance fees) at the same location over an overlapping period of time. Both audits examined whether SRM was collecting rent and fees from the same tenants in accordance with the same leases. Thus, while there may be separate occurrences, those occurrences are clearly related because they are "logically or causally connected by common facts, circumstances, transactions, events and/or decisions.

As such, the court agreed that all claims arising out of the alleged erroneous act would be deemed first made in July 2009, and thus prior to the inception date of the Capitol policy.

Florida Court Holds No Coverage for Related Claims Under E&O Policy

In its recent decision in Zodiac Group v. Axis Surplus Ins. Co., 2012 U.S. Dist. LEXIS 176622 (S.D. Fla. Dec. 13, 2012), the United States District Court for the Southern District of Florida had occasion to consider whether an insured was entitled to coverage under a claims made and reported professional liability policy for a newly filed lawsuit related to a earlier suit filed prior to the policy’s date of inception.

The underlying dispute arose out of a contract between Zodiak and Linda Georgian, whereby Ms. Georgian was hired to endorse Zodiak’s telephone psychic services.   In April 2008, Ms. Georgian brought suit in state court against Zodiak for allegedly continuing to use her name and likeness in their advertising after the endorsement contract terminated.  The suit was dismissed for lack of prosecution in November 2009, but later refiled in federal court in January 2010, albeit with slightly different causes of action.

In September 2008, while the earlier state court suit was pending, Zodiak applied for a professional liability insurance policy from AXIS.  The policy application required Zodiak to identify any pending or prior claims made in the last five years.  In response, Zodiak stated “Former contract celebrity claimed unauthorized use of her name after their [sic] relationship ended. Allegations of invasion of privacy & injunctive relief.”  AXIS subsequently issued a one year claims-made and reported professional liability policy for the period October 2008 through October 2009.  The policy was later renewed for the period October 2009 to October 2010.  Notably, the 09-10 policy provided coverage for wrongful acts committed subsequent to the policy’s March 6, 1998 retroactive date and prior to inception date of the policy, but only if the claim was first made during the policy period, and only if prior to the policy’s date of inception the insured was unaware of circumstances that could give rise to a claim.   Additionally, the policy stated that "[a]ll Claims arising from the same Wrongful Act will be deemed to have been made on the earlier of" either "[t]he date the first of those Claims is made against any Insured," or “[t]he first date the [insurance company] receives the Insured's written notice of the Wrongful Act.” 

Zodiak contended that although the earlier state court was first made prior to the inception date of either policy, the lawsuit later filed in federal court should be considered a claim first made and reported during the 09-10 policy period, and thus covered under that policy.  AXIS countered that the federal court lawsuit involved the same allegations as the previously filed state court lawsuit, and that it light of this relationship should be considered a claim first made prior to the 09-10 policy’s inception date.

Observing that the federal court lawsuit was premised on the same alleged wrongdoing as alleged in the earlier state court lawsuit, the court granted AXIS’ motion to dismiss Zodiak’s complaint.  The court reasoned that the two preconditions for coverage for prior wrongful acts were not satisfied.  First, the federal court lawsuit was not first made during the policy period given its relationship to the state court lawsuit.  Second, Zodiak failed to establish that at the time of the policy’s issuance, it was unaware of circumstances that could give rise to a claim.  On the contrary, its responses in the application indicated otherwise.  As the court explained:

Nor is it true that Zodiac had no knowledge, prior to the policy's inception date, "of a circumstance that could reasonably be expected to lead to the Claim." … That is plainly false because Zodiac in fact disclosed on its application for insurance the underlying dispute with Georgian that later materialized into the federal lawsuit. In response to the question about pending or prior claims, Zodiac wrote that a "[f]ormer contract celebrity claimed unauthorized use of her name after their relationship ended," and that the suit involved "[a]llegations of invasion of privacy & injunctive relief." … Although Zodiac responded "no" to the question about whether it knew of any facts or circumstances that might reasonably result in a future claim being made, that obviously does not lessen its knowledge about the April 2008 state court lawsuit and the circumstances and facts underlying it.

Utah Federal Court Holds Pain Pump Claims Not Related

In its recent decision in Columbia Casualty Company v. SMI Liquidating, Inc., 2012 U.S. Dist. LEXIS 162892 (D. Utah Nov. 14, 2012), the United States District Court for the District of Utah had occasion to consider the concept of “related claims” in the context of claims made products liability policies.

The insurance dispute in SMI Liquidating arose out of defective shoulder pain pumps manufactured by Sorenson Development, which was insured by Columbia Casualty under successive policies.  The first such policy, issued for the period July 1, 2007 through July 1, 2008, had limits of liability of $10 million per claim and in the aggregate, subject to a $25,000 deductible per claim and a $125,000 deductible aggregate.  Notably, the 07-08 policy contained a “related claims” provision that stated, in pertinent part:

If related claims are subsequently made against the Insured and reported to the Company, all such related claims, whenever made, shall be considered a single claim first made and reported to the Company within the policy period in which the earliest of the related claims was first made and reported to the Company.

The policy defined “related claims” as all claims arising out of the same occurrence or related occurrences.  Further, the policy defined related occurrences as those “that are logically or casually connected by any common fact, circumstance, condition, situation, transaction, event, advice or decision in the design, formulation, manufacturing, distribution, sale, testing, use, operation, maintenance, repair or replacement of your product or your work.”

While the 07-08 policy was in effect, Sorenson was named as a defendant in four lawsuits relating to its pain pumps.  Columbia initially treated these suits as separate claims, each triggering a separate deductible.  Columbia did, however, have internal deliberations between its claim and legal departments as to whether the four suits should be considered related claims triggering only a single deductible. 

Toward the end of the 07-08 policy period, Columbia began the underwriting process for a renewal.  During this process, the Columbia underwriter learned of the pending pain pump claims and became concerned about future claims.  She determined that the renewal would have different deductible terms than the 07-08 policy.  She offered a renewal on the terms that all claims other than shoulder pump claims would be subject to the original $25,000 deductible per claim, with a $125,000 deductible aggregate, but that shoulder pump claims would be subject to a $250,000 deductible per claim, unaggregated.  Sorenson’s risk manager understood  at the time why the renewal would be on different terms and reluctantly agreed to it.  The renewal became effective on July 1, 2008.

Claims continued to be made against Sorenson during the end of the 07-08 policy period and into the 08-09 policy period.  In August 2008, some seven weeks after the 08-09 policy became effective, Columbia’s claim department decided to treat all pending claims as being related and thus covered only under the 07-08 policy.  Notwithstanding its decision, Columbia continued charging Sorenson separate deductibles for each new claim made.  Over the next year, as new claims were made against Sorenson, Columbia issued supplemental correspondence amending the grounds on which Columbia determined that the underlying claims were related.  Thus, whereas Columbia initially took the position that various claims were related because they involved the same pain pump model, this later evolved into the position that any claims involving any pain pump model manufactured by Sorenson were related. 

During a mediation in November 2009, the issue of related claims was brought to a head. Columbia advised that it would be tendering the remaining limits of its 07-08 policy in connection with an upcoming mediation, and that at that point, its coverage obligations would be terminated.  Around the same time, Columbia learned of the fact that it had been charging multiple deductibles instead of a single deductible as it should have in light of its related claims position.  Columbia tried to refund the “erroneously” paid amounts to Sorenson, but Sorenson refused to accept the check.  Columbia subsequently filed a coverage action against Sorenson seeking a declaration that the pain pump claims were related claims covered only under the 07-08 policy, and not covered under the 08-09 policy.

In considering the issue, the court focused primarily on the deductible language contained in the 08-09 policy that specifically distinguished pump claims from non-pump claims.   This deductible scheme, concluded the court, indicated “a clear and unequivocal agreement that shoulder pump claims would be covered, subject to specialized deductibles.”  Columbia’s “related claims” position, observed the court, would negate this express and specific language.  The court further concluded the concept of related claims in the 07-08 policy could be harmonized with coverage for pump claims in the 08-09 policy, agreeing with Sorenson’s contention that “whatever was intended to fall within the scope of the related claims’ clause, the parties specifically agreed that it would not include the expressly dealt with shoulder pump claims.”

While the court reached its conclusion based on the plain terms of the 08-09 policy, it noted that extrinsic evidence would have compelled the same holding.  Specifically, the fact that Sorenson and Columbia negotiated the deductible scheme for the 08-09 policy indicated to the court that the parties considered and agreed on the manner in which the 08-09 policy would provide coverage for pain pump claims.  Absent from these negotiations was any discussion that the specialized deductible would apply only if Columbia decided that pump claims made in 08-09 were not related to those made in the 07-08 policy.  In this regard, the court found it “significant that Columbia’s decision to treat all shoulder pump claims as ‘related claims’ under the Year One policy post-dates the effective date of the Year Two policy by over a month.”  Thus, the court concluded that the parties’ contemporaneous communications, at least at the time the 08-09 policy was issued, reflected a mutual understanding that pump claims would be covered under the 08-09 policy.   Columbia’s subsequent decision that the claims would only be covered under the 07-08 policy “fundamentally altered the allocation of risk bargained for by the parties in the Year Two policy and was contrary to the parties’ express intentions at the time of contracting.”