Claims Made Coverage - New Millenium Developments
“[Alice] puzzled over this for some time, but at last a bright thought struck her. ‘Why, it’s a looking glass book, of course! And, if I hold it up to a [mirror], the words will go all the right way again.’”
Alice’s insight is a metaphor for what the policyholder community hopes to see in the new millennium as to claims-made coverage disputes, viz., “the [decisions] will go the right way again.” In fact, though, with some exceptions, the court decisions since January 1, 2000, continue to reflect the earlier tribulations of policyholders when they have entered the fray with their insurers as to coverage under claims-made policies. However, as the new century case law reflects, even insurers will hope to profit from Alice’s logic because of the number of disputes that involve one insurer suing another as to which of their claims-made policies is triggered by a “claim” for which timely notice has been provided by the policyholder. This article will review new millennium claims-made coverage decisions in order to highlight the areas of most frequent litigation and how they have been resolved.
The issues addressed by the courts in the 21st century with respect to claims-made disputes have focused on a number of questions, but the three most common that are discussed here are:
1. Can the notice of claim requirement be satisfied by actual notice to the insurer, rather than formal notice provided only by the policyholder to the insurance company, and do any courts require an insurer to demonstrate that it has been prejudiced to the extent that the policyholder has not complied with the notice requirements of claims-made coverage?
2. What constitutes a “claim” and when it is “made” under the terms of claims-made policies?
3. Finally, how have the courts resolved the frequent dispute as to whether a claim allegedly first made during the claims-made policy period is barred from coverage because of the exclusion that precludes coverage to the extent that a claim is related to an earlier claim made prior to the inception of the policy period?
Notice Of Claim And Prejudice To The Insurer By Late Notice
One of the first principles of claims-made coverage, at least from the insurers’ perspective, is that the notice of a claim must be given by the policyholder during the policy period, or, if applicable, during an extended reporting period. One rationale for claims-made coverage is that it provides insurers with the assurance that if a claim is not made during the period the policy is in effect, then their potential exposure ends. In short, this feature creates an underwriting process with greater predictability and less concern for long-tail exposure that is a feature of occurrence policies. Further, insurers would argue that claims-made policies benefit policyholders as well by being less expensive. In any event, from the insurers’ perspective, the linchpin to the value of claims-made coverage is the requirement of notice within the policy period (or extended reporting period) that cannot be vitiated by the requirement that insurers be required to show prejudice if notice is late. Courts have continued to find this argument appealing in the new century, but as the discussion below indicates, there are some exceptions to the rule.
The Majority Rule--Late Notice Means No Coverage
Regardless of Prejudice to the Insurer
The general rule on notice under claims-made policies was applied by an Illinois federal court inPacific Ins. Co. v. Eckland Consultants, Inc. Plaintiff Pacific Insurance Company (“Pacific”) brought this declaratory judgment action against a former policyholder, Eckland Consultants (“Eckland”) based on Eckland’s alleged failure to provide timely notice of an underlying action for which it sought coverage. Eckland provided architectural and engineering services, and purchased professional liability coverage from Pacific. The Pacific policy provided coverage to Eckland for all claims that were: (1) “first made” against Eckland during the policy period; and (2) reported to Pacific during the policy period or within 60 days after the expiration or termination of coverage.
Eckland was sued in Texas state court by clients seeking damages based on an inspection report that Eckland had prepared for an apartment complex. This lawsuit was a claim “first made” against Eckland within the Pacific policy period. However, Eckland did not report the claim to Pacific’s claim handler until well beyond the time period for reporting claims under the policy. Eckland argued that it satisfied the notice requirements of the Pacific policy because it provided notice of the underlying lawsuit within the policy period to an insurance broker that had procured the Pacific policy for Eckland. Eckland argued that the broker was Pacific’s agent and that notice to the broker was sufficient under the Pacific policy.
The court rejected Eckland’s contention that notice was timely because the notice of claim had been sent to an alleged agent of Pacific. The court determined as a matter of law that there was simply no proof that the broker, even if it were the agent of the insurer, had received the letter describing the underlying litigation until well after the policy period had expired.
Further, the court rejected Eckland’s argument that Pacific had to demonstrate that it was prejudiced by the late notice. Applying Illinois law, the federal court ruled that the issue of prejudice is inapplicable in the context of a claims-made insurance policy as opposed to an occurrence policy.
A Delaware court reached a similar conclusion. In Homsey Architects, Inc. v. Harry David Zutz Ins., Inc., plaintiff Homsey Architects, Inc. (“Homsey”) purchased a claims-made errors and omissions policy from International Surplus Lines Insurance Company (“ISLIC”). Homsey’s coverage under the ISLIC policy had a 60-day extension period for notice of claims and provided coverage for claims made after the conclusion of the policy if Homsey provided notice of potential claims within the policy period. Homsey had been involved in the design of a parking garage in which defects were discovered, and Homsey submitted notice of a potential claim involving the garage, but only after the ISLIC policy period had expired. ISLIC denied coverage, prompting Homsey to file this action.
Although Homsey provided notice to its insurance broker of the potential claim within the policy period, the insurance broker did nothing with respect to that information until after the expiration of the policy period. Accordingly, ISLIC denied coverage because notice of the potential claim was late. The policy provided that notice could be provided to an agent of ISLIC, Professional Coverage Managers, Inc. (“PCM”). There was a dispute between ISLIC and Homsey as to whether ISLIC had revoked PCM’s authority to receive notices from Homsey. Because of the ambiguity on this point, the court resolved that the policy should be construed to permit Homsey to provide notice of claims to PCM as a proper agent for ISLIC.
Homsey argued that it had provided timely notice because it had sent notice of a potential claim to PCM within the 60-day extended reporting period. ISLIC, on the other hand, argued that the 60-day extension period applied only to the reporting of claims, as opposed to potential claims. The court agreed with ISLIC, finding that the language of the policy permitted the extension period only to apply to notice of claims as opposed to potential claims, and therefore ISLIC had not been provided with timely notice of the claim as required by the policy.
Homsey next argued that ISLIC had to demonstrate that it had sustained actual prejudice by the late notice. The issue of whether prejudice was required in the context of claims-made coverage was an issue of first impression in Delaware. Reviewing the decisions from other jurisdictions on this point, the court concluded that the overwhelming majority of them supported ISLIC’s position that a showing of prejudice was not required with respect to claims-made coverage, and the court concluded that the majority rule should be applied in Delaware.
Homsey finally argued that it had provided actual notice of the potential claim within the policy period when it submitted its application for subsequent coverage to Steadfast Insurance Company (“Steadfast”) because the application had been sent to PCM, which was also acting as an agent for Steadfast. The court’s rejection of this argument was presaged by its statement that “no one contends that Homsey supplied this information for the purpose of providing PCM with notice of a claim or potential claim under the ISLIC policy.” The court concluded that it was necessary to effectuate the purpose of the policy for the policyholder to provide notice through the formal channels directly to ISLIC or its claims handlers. The court did not think that a policyholder could insist that the insurance company’s underwriting department sift through renewal applications and decide what should be forwarded to the claims department on the policyholder’s behalf.
Other recent decisions have reached the same results as in Eckland and Homsey.
Exceptions to the Majority Rule
There is hope for policyholders in some jurisdictions. For example, if an insurer receives notice during the claims-made policy period from a source other than the policyholder, is that sufficient to satisfy the notice requirement or at least to invoke the prejudice requirement? One recent case has said yes to that question. Moreover, the policyholder can seek comfort in the fact that some enlightened states have established statutory requirements that extend the period in which notice can be provided beyond the claims-made policy period or extended reporting period. Additionally, other states require, by statute, that the insurer demonstrate prejudice even for late notice under claims-made coverage.
For example, in Great American Ins. Co. v. Short, a claims-made dispute arose in California state court under a legal malpractice insurance policy issued by Great American Insurance Company (“Great American”) to an attorney, Duane McCollum (“McCollum”). The Great American policy contained the standard requirements for providing Great American with notice within the policy period of any claim brought against the policyholder and required the insured to cooperate with Great American in dealing with any claims.
McCollum’s client, Ernest H. Short (“Short”), began experiencing difficulties in his relationship with McCollum in early 1999 and at one point, when Short threatened to sue McCollum for malpractice, McCollum advised him that he had not paid the premium on his malpractice insurance with Great American. Short, the client, on his own initiative contacted Great American and paid the premium on McCollum’s policy. Eventually the relationship between Short and McCollum broke down completely after default judgments were entered against Short in two actions in which McCollum represented him.
Short filed a legal malpractice action against McCollum and immediately sent a copy of the complaint to Great American. In the meantime, Great American contacted McCollum and warned him that unless he cooperated in attempting to defend the malpractice action, Great American would not be obligated to provide coverage to him under its policy. Short eventually obtained a default judgment against McCollum for malpractice in the amount of $500,000 in March, 2000. Great American filed a declaratory judgment action against Short and McCollum, and the trial court granted Great American summary judgment, based on its alleged untimely receipt of notice of the claim. The trial court also held that the notice-prejudice rule did not apply because the policy at issue was a claims-made policy.
On Short’s appeal, the court of appeals questioned whether in fact notice was untimely. Resolution of this question depended on whether notice to Great American by a third-party claimant against the policyholder could constitute effective notice within the terms of the claims-made policy. The court ruled that notice by the attorney’s client, rather than the policyholder attorney himself, could constitute effective notice within the terms of the policy. The court noted, “[i]t is the rule in the vast majority of other states that a third-party claimant can give notice.” The court concluded that there was at least a triable issue of fact with respect to whether the client’s notice complied with the policy.
The court next addressed the issue of prejudice. The court of appeals acknowledged that in California, like many states, the notice-prejudice rule generally does not apply to claims-made policies. The court recognized the importance of notice in the claims-made coverage scheme and that permitting an extension of the reporting time after the end of the policy period would amount to providing the policyholder with broader coverage than it had paid for.
Significantly, though, the court determined that the prejudice issue was an appropriate requirement for the insurer to satisfy when the prejudice allegedly emanated from some circumstance other than late notice. Because the court determined that Great American had actual notice during the policy period, the reasons for refusing to apply the notice-prejudice rule to a claims-made policy were not implicated.
There is no danger that applying the notice-prejudice rule will result in the extension of coverage beyond the policy period; there is no danger of converting a claims-made policy into an occurrence policy. We conclude that the notice-prejudice rule does apply to a claims-made policy, provided the asserted defect in the notice has to do with its source, rather than its timing.
The court stated that to the extent that Great American was prejudiced at all, it was because of the failure of the policyholder, McCollum, to cooperate with respect to the malpractice action that had been brought against him. Again, however, the court of appeals determined that the insurance company would have to demonstrate prejudice with respect to this lack of cooperation. Under California law, the insurer would have to establish, at the very least, that if the cooperation clause had not been breached there was a substantial likelihood the trier of fact would have found in favor of the policyholder. The court noted that there was little if anything in the record to suggest that if the policyholder had cooperated with Great American in the defense of his malpractice claim, the judgment obtained by Short would have been any less.
Two other claims-made decisions on late notice also resulted in victories for policyholders based on state statutory restrictions on policy notice requirements. The more recent of these two decisions isLeBlanc v. Succession of Raggio. In this coverage dispute in Louisiana relating to legal malpractice insurance coverage, the court held that the notice requirement of the claims-made policy at issue conflicted with Louisiana statutory law relating to notice requirements in insurance policies. The plaintiff filed a direct action against Westport Insurance Corporation (“Westport”), the malpractice insurer for the plaintiff’s deceased attorney, Joseph R. Raggio. The trial court had granted summary judgment in favor of Westport on the ground that while LeBlanc’s malpractice claim arose during the period of coverage, Westport did not receive notice until after the policy had terminated.
On appeal, LeBlanc contended that the notice requirement in the Westport claims-made malpractice insurance policy violated Louisiana statutory law. Specifically, she argued that the provision was void because it violated a Louisiana statute that required any insurance contract issued in Louisiana to afford a claimant at least one year from the time when the cause of action accrued to provide notice to the insurance company.
While Westport argued that there was nothing in its policy that contravened Louisiana public policy and that the Louisiana Supreme Court had sustained the validity of claims-made coverage generally, the LeBlanc court nonetheless reversed the grant of summary judgment in favor of Westport. It found that Westport’s policy provision that required notice to be given to the insurer within the policy period, as applied to the facts of the case, gave the policyholder less than one year to give notice, and was therefore unenforceable because it contravened the statute that mandated that all policyholders be given one year from the accrual of the claim to provide notice.
The policyholder also prevailed in Utica Mutual Ins. Co. v. Hickman, again based upon statutory requirements relating to notice. Utica Mutual Insurance Company (“Utica”) sought a declaratory judgment in Texas federal court that it had no duty to defend or indemnify defendants John L. Hickman (“Hickman”) and J. L. Hickman & Co., Inc. (“JLH”), an insurance agency with offices in Texas and Maryland, under claims-made errors and omissions policies (the “Texas policy” and the “Maryland policy.”).
After the expiration of the policy and reporting periods under the Texas policy but within the extended reporting period under the Maryland policy, CIGNA Insurance Company (“CIGNA”) and others sued JLH and Hickman in Texas asserting claims relating to the mishandling of premiums. CIGNA eventually obtained a default judgment against JLH for almost $700,000. Reliance Insurance Company (“Reliance”) filed another action against JLH and Hickman, again after the expiration of the Texas policy period but within the extended reporting period under the Maryland policy. The Reliance claims were similar to those advanced by CIGNA. Reliance also obtained a judgment against JLH in the amount of $472,500, plus interest.
Utica did not defend JLH or Hickman in either the CIGNA or Reliance lawsuits. It denied coverage and filed a declaratory judgment action seeking a determination that it had no duty to defend or indemnify JLH or Hickman. Hickman conceded that he had no claim against Utica with respect to the Texas policy because the claims at issue by CIGNA and Reliance were filed after the expiration of that policy. However, he did contend that there was coverage for defense costs and indemnification under the Maryland policy.
In response to Hickman’s argument for coverage under the Maryland policy, Utica argued that it had no duty to defend or indemnify Hickman in the Reliance action because Hickman failed to give timely notice of the claim. While Hickman conceded that he did not personally notify Utica of the claim, he contended that notice of the claim given by a JLH executive vice president was sufficient under the terms of the policy. The court, applying Maryland law, held that there was no evidence that the content of the notice was inadequate and the notice was provided by an executive of JLH who, like Hickman, was a named defendant in the same Reliance lawsuit.
Utica also argued that Hickman did not provide timely notice under the Maryland policy concerning the CIGNA action. Hickman did not provide Utica with written notice of the CIGNA claims until more than 16 months after CIGNA had filed suit. In fact, the notice was not received by Utica until approximately one month before the claims were scheduled for mediation and two months before trial had been scheduled to begin. While Hickman alleged that he had given timely oral notice to Utica, a fact disputed by Utica, the court determined that the outcome would not turn on that factual dispute. Rather, the court found that under Maryland statutory law, even with claims-made insurance policies, the insurer had to demonstrate that giving late notice resulted in actual prejudice to the insurance company. On that point, the court found that Utica had offered no proof of actual prejudice. For example, even when Utica received written notice of the CIGNA action, it denied that it had any duty to provide coverage. The court found that because of Utica’s repeated assertions that it had no duty to defend Hickman or other JLH employees under the terms of the Maryland policy, Utica had failed to present a genuine issue of material fact that it had suffered actual prejudice.
When Is A Claim A Claim?
As its name implies, claims-made coverage is triggered by and covers “claims” brought against a policyholder during the policy period. Superficially, it would seem rather obvious that the policyholder should know when a third-party has made a “claim” against it that might be covered by its claims-made policy. Judging from the decisional law, such an assumption is too facile. This issue arises in a number of situations, including, inter alia, those in which the policyholder believes a claim made before the filing of a lawsuit is simply a threat or without merit and therefore not really a claim; the policyholder realizes, too late, that a claim was made against it under a prior policy and therefore is not covered by a later policy; and, the policyholder determines that what it thought was an excluded claim is actually a covered claim.
The Problem Of Determining What Is A Claim From A Series Of Related Events
In this twilight zone of claims-made coverage disputes, it is not uncommon for there to be factual circumstances that make it difficult to determine whether there is a claim at all, only one claim, or multiple claims. It is not only the policyholder that is placed on the horns of the dilemma of deciding what constitutes a claim. As some recent cases illustrate, such a dispute often arises between insurers in different policy periods as to whether there is a claim and, if so, when it was made. An example of this latter situation confronted a Washington court this year in Washington Casualty Co. v. The Doctors’ Co., where two insurers disagreed as to what constituted a claim and which insurer’s policy was triggered by the claims.
This case involved medical malpractice insurance coverage and a dispute that arose from the prenatal care and delivery of an infant who was born a quadriplegic. The underlying plaintiff, Karen Migliuri, received prenatal care from several physicians at a clinic in Spokane, Washington. Two of the physicians in that clinic, Drs. Bachhuber and Fruen, who were co-owners of the clinic, performed a procedure that was designed to move Mrs. Migliuri’s baby from a breech position to facilitate a normal birth. A week after that procedure was performed, Migliuri went into induced labor, and her child was delivered by Dr. McKenna, another physician and co-owner of the clinic. The clinic had medical malpractice insurance coverage under a claims-made liability policy with The Doctors’ Company for three years from January 1, 1993 through January 1, 1996, with new coverage from Washington Casualty Company (“Washington Casualty”), that incepted after the Doctors’ Company policy.
Mr. and Mrs. Migliuri filed a medical malpractice action in September, 1995, approximately three years after the birth of their child and within the Doctors’ Company policy period. Before the medical malpractice action had been filed, the clinic had notified The Doctors’ Company within its policy period of a request by Migliuri in 1993 for her medical records, and Dr. Bachhuber had filled out a form provided by The Doctors’ Company that provided a report concerning the potential claim.
In April, 1999, after the settlement of their initial action against Drs. Bachhuber and Fruen, the Migliuris amended their complaint to assert a claim against Dr. McKenna, the physician who had actually delivered the child. Washington Casualty defended that action on behalf of Dr. McKenna and the clinic and paid the resulting settlement. It then brought suit for reimbursement against The Doctors’ Company, alleging that the “claim” against McKenna was really part of the same claim that had been brought within The Doctors’ Company policy period and that The Doctors’ Company was therefore liable for the coverage amounts paid by Washington Casualty with respect to the defense and indemnity of Dr. McKenna. Washington Casualty advanced five arguments in support its position that the claim against Dr. McKenna was really part of the same claims against Drs. Bachhuber and Fruen. The Court rejected each of Washington Casualty’s positions as follows:
- The information provided by the clinic to The Doctors’ Company in response to the Migliuris’ 1993 request for the medical records of Mrs. Migliuri constituted a claim against Dr. McKenna. The court disagreed. All of the information given to The Doctors’ Company at that time focused on the procedure performed by Drs. Bachhuber and Fruen. Nothing in that contact mentioned Dr. McKenna.
- The court held that the report provided by the clinic to The Doctors’ Company did not constitute notice of a claim or potential claim against Dr. McKenna, even though Dr. McKenna was mentioned in passing as being the doctor who delivered the child. The report focused on the involvement of Dr. Bachhuber in addressing the breech position as the alleged cause of the injuries sustained by the child.
- The provision in The Doctors’ Company policy that two or more causes that resulted in injury to a patient would be treated as a single claim for purposes of determining the per-claim liability limit meant that the “claim” at issue arose during the period of The Doctors’ Company’s coverage. The court held that such policy language was concerned only with policy limits and would not have caused an insured to understand it as modifying or controlling the notice of claim requirements.
A November, 1995 letter from The Doctors’ Company that appointed counsel and that stated that counsel was to defend the interests of Drs. Bachhuber, Fruen, and McKenna with respect to the Migliuris’ claim reflected a “claim” for medical malpractice against Dr. McKenna. In the court’s view, Dr. McKenna was identified in this letter merely because he happened to be an owner of the clinic along with the other doctors and did not constitute a “claim” within The Doctors’ Company’s policy period.
The Migliuris’ original complaint filed during The Doctors’ Company policy period named as defendants, Drs. Bachhuber and Fruen, the clinic and other “John Doe” defendants. The Court considered the reference to “John Doe” physicians as nothing more than boilerplate pleading and held that such a pleading did not identify a “claim” against Dr. McKenna. Accordingly, the court held that the complaint provided no indication of a claim or potential claim against Dr. McKenna for his delivery of the infant.
Thus, the court affirmed the trial court’s summary judgment in favor of The Doctors’ Company on the ground that the “claim” against Dr. McKenna arose during the period of coverage provided by Washington Casualty when the complaint was filed against Dr. McKenna.
The decision from the Louisiana federal court in Orleans Parish School Board v. Chubb Custom Ins. Co., addressed another variation on the theme addressed in Washington Casualty, above, as to when a “claim” is made when it is arguably part of a series of related events. In that action, Gulf Insurance Company (“Gulf”) sold a claims-made insurance policy to Group Insurance Administration of Louisiana, Inc. (“Group Administration”). During the effective period of the policy, Group Administration was retained to operate a health insurance plan for the Orleans Parish School Board (“Orleans Parish”). After the expiration of the Gulf policy, Orleans Parish sued Group Administration seeking damages for Group Administration’s alleged misrepresentation, unjust enrichment, RICO violations, and failure to administer the health plan in question properly.
The case posed a very simple issue--how could Group Administration obtain coverage under its claims-made policy with Gulf when the litigation brought against Group Administration by Orleans Parish postdated the policy period? Group Administration made two arguments. First, it contended that Orleans Parish had made a claim against Group Administration within the policy period, when Orleans Parish sent a memorandum to Group Administration requesting a detailed breakdown of unprocessed, rejected and duplicate health claims. In response to this argument, the court observed, significantly, that nowhere in this memorandum did Orleans Parish assert a legal right or ask for damages against Group Administration, and therefore that the simple request for information could not possibly be construed as a claim.
Group Administration’s second argument was that even if Orleans Parish did not make a claim within the policy period, coverage existed under the “Multiple Claims” provision of the Gulf policy. This provision in the Gulf policy established the origination date of the claim, where there was a series of related claims, as the date when the first of these related claims was made. There had been unrelated individual lawsuits and a class action filed against Group Administration prior to the Orleans Parish suit for negligent administration of the Orleans Parish health insurance plan, with the principal allegation in those cases being that Group Administration failed to pay claims in a timely manner. The court held that Orleans Parish’s complaint in the underlying action at issue in this coverage case did not show any nexus to those earlier claims made by individuals or classes of individuals. Furthermore, Group Administration had not presented any evidence to suggest that the wrongful acts alleged in the previous lawsuits were directly connected to the subject matter of the case filed by Orleans Parish after the end date of the Gulf policy. Accordingly, the court granted Gulf’s motion for summary judgment that there was no coverage under its policy.
Continental Casualty Co. v. Coregis Ins. Co., is another claims-made coverage case in which the policyholder had given timely notice and there was a dispute between two consecutive insurance companies that had sold claims-made policies to the policyholder as to which policy should be responsible for the “claim.” The plaintiff, Continental Casualty Company (“Continental”) sued Coregis Insurance Company (“Coregis”) in Illinois state court based on the allegation that Coregis, which had issued a claims-made policy for accountants’ professional liability to Clark Nuber & Company (“Clark Nuber”), was responsible for providing coverage to the policyholder.
Clark Nuber was involved in the auditing of a client’s account in anticipation of a public offering of the client’s stock. The underwriter for the proposed public offering retained another accounting firm that reviewed Clark Nuber’s work and raised an issue as to the findings and conclusions of Clark Nuber’s audit. When Clark Nuber was informed of these findings, it sent a letter to Coregis one day before the Coregis policy was to expire, in which it advised Coregis of the details concerning the possible claims that might arise from the audit it had performed for its client. In December, 1995, shareholders of Clark Nuber’s client filed a securities fraud class action against Clark Nuber alleging that the financial statements in the client’s public stock offering were materially false and that Clark Nuber had participated in the development of these false figures. Clark Nuber had also provided timely notice to its subsequent claims-made insurer, Continental, and together Coregis and Continental paid the settlement of the action brought against Clark Nuber with Continental paying $2 million and Coregis paying $200,000. In December, 1996, Continental filed the instant action against Coregis seeking contribution for the settlement amount that Continental had paid in the underlying action based upon the contention that the “claim” had arisen during the Coregis policy, notice had been timely provided to Coregis by the policyholder during the Coregis policy period, and therefore Coregis was responsible for the payment of the entire loss.
Coregis’ principal defense to Continental’s demand that Coregis indemnify Continental for the $2 million Continental contributed to the settlement of the underlying litigation was that, while a claim had been made during the Coregis policy period, the claim ultimately asserted in the complaint filed during the Continental policy period went beyond the claim that had been made at the very end of the Coregis policy period, and therefore, according to Coregis, at the very least there should be some allocation of the coverage between Continental and Coregis.
The court rejected Coregis’ argument. The court noted that Coregis conceded that the letter from its policyholder was sufficient to trigger coverage under its policy. Furthermore, the Coregis policy provided that any subsequent claims made against Clark Nuber that arose out of the act, error or omission that constituted the claim for which Clark Nuber gave timely notice to Coregis would be considered as having been made and reported during the policy period of the Coregis policy. The court compared the allegations in the shareholders’ action against Clark Nuber with the notice provided by Clark Nuber to Coregis that described the potential claim that might be asserted against it with respect to its accounting or auditing practices for its client. In reviewing those two documents, the court held that the allegations in the shareholders’ complaint filed during the period of the Continental policy were essentially congruent with the claim as described by Clark Nuber in its notice to Coregis the day before the Coregis policy expired.
A similar issue arose in a Florida federal action, Pantropic Power Products, Inc. v. Fireman’s Fund Ins. Co. The plaintiff, Pantropic Power Products, Inc. (“Pantropic”), purchased a claims-made employment-related practices liability insurance policy from Fireman’s Fund. The policy provided for the payment of damages and the defense of claims arising from wrongful employment practices. The first policy sold by Fireman’s Fund to Pantropic incepted in 1998, and Pantropic renewed its coverage and entered a second claims-made policy with Fireman’s Fund in 1999.
During the first policy period, a Pantropic employee filed an administrative charge of sexual harassment against Pantropic. Subsequently, the employee, after exhausting his administrative rights, filed suit against Pantropic in the second policy period. The complaint alleged that Pantropic had retaliated against him because of his prior allegations of sexual harassment that were presented in the administrative proceeding. Within two weeks of the filing of the suit, Pantropic reported that action to Fireman’s Fund under the second policy. Fireman’s Fund denied the claim based on the fact that Pantropic had failed to report the claim within 60 days of the expiration of the first Fireman’s Fund policy during which time the administrative claim had been made.
The core of the dispute between Pantropic and Fireman’s Fund was whether the “claim” made by the Pantropic employee originated exclusively with the filing of the employee’s administrative complaint or, to the contrary, whether the employee’s court complaint, that made claims against Pantropic which had not been a part of the administrative proceeding, fell within coverage.
Pantropic argued that the additional claims made in the complaint by the Pantropic employee could not have come into existence until after the employee had filed his administrative charge. Thus, Pantropic asserted that the additional claims could not have been raised against Pantropic until the court complaint was filed and, if that were the case, Pantropic timely provided notice under the second policy within two weeks of the filing of that complaint. In opposition to that position, Fireman’s Fund argued that the claims stated in the complaint “arose from the same wrongful practice, or series of related wrongful employment practices,” and accordingly should be deemed the same claim which was first made by the employee during the period of the first Fireman’s Fund policy.
The court adopted Fireman’s Fund’s interpretation. The policy language, of course, provided that claims arising from the same wrongful employment practice or series of similar or related wrongful employment practices were deemed to be a single claim for purposes of the notice provision in the policy. The court reasoned that the “relatedness” element of the claim was to be broadly construed “such that claims that are causally connected, or which arise from similar factual circumstances, are ‘related’ for purposes of the provision of notice.” The court emphasized that the circumstances that gave rise to the employee’s allegations in his administrative proceeding and the subsequent court action involved the same individuals. Also, the employee’s allegations of retaliation and negligence, raised in his court action, occurred as a consequence of the prior acts of harassment asserted in the administrative proceeding. Based upon those factors, the court concluded that there was a substantial nexus between the claims asserted in the employee’s court complaint and his earlier administrative proceeding. Consequently, Pantropic’s notice to Fireman’s Fund was late because it should have been submitted at the time the employee filed his administrative claim under the first Fireman’s Fund policy.
A Threat Of Legal Action Or An Assertion Of Injury As A Claim Or Potential Claim
One recurring lesson for policyholders is always to treat the threat of legal action or an assertion of injury or damages by a third party, no matter how frivolous it may appear, as a “claim” or potential claim that requires the giving of notice under a claims-made policy. The need to give notice under these circumstances would appear to be the classic “no brainer.” Policyholders, however, frequently do not give notice of these claims or potential claims usually because they want to save premium costs on policy renewals, the proverbial penny-wise, pound-foolish approach to insurance coverage.
A typical recent example of this issue is Carosella & Ferry, P.C. v. TIG Ins. Co. In that case, the plaintiff Carosella & Ferry, P.C. (“Carosella”) sued its legal malpractice insurer, TIG Insurance Company (“TIG”) in Pennsylvania federal court, for breach of its claims-made malpractice policy sold to Carosella.
During the TIG policy period, Carosella received a letter from an attorney representing Carosella clients, in which the new attorney for the clients indicated that the clients would be suing Carosella for professional malpractice. The letter requested that Carosella put its malpractice insurer on notice of the claim. Carosella responded by asserting that there was no basis for such a malpractice claim and that it did not intend to contact its malpractice insurer. The Carosella former clients eventually sued Carosella. Carosella thereafter notified its malpractice insurer, TIG, of the malpractice complaint and requested that TIG provide it with a defense in that action under the TIG malpractice policy in effect when the suit against Carosella was filed.
TIG argued that there was no coverage because its policy only covered claims made during the policy period, and the claim made by the former clients of Carosella was made prior to the period of its policy. There was no question that the malpractice complaint was filed during the applicable policy period. However, TIG contended that the policy required Carosella to provide notice if it “knew or should have known that a wrongful act, error or omission or Personal Injury had occurred or had a reasonable basis to foresee that a Claim would be made against,” Carosella. Based on that language in the policy, the court concluded that Carosella clearly should have reasonably foreseen that it would be sued based on its receipt of the letter from counsel for the Carosella former clients. In the court’s view, such a letter would meet either an objective or subjective standard of foreseeability. The court rejected Carosella’s argument that it knew that it had not committed malpractice and, therefore, the threatened malpractice suit’s lack of merit would not notify a reasonable attorney of any wrongful act that he or she might have committed. It dismissed that contention by observing that the relevant policy provision did not focus on whether the policyholder knew or should have known that it committed a wrongful act, but rather whether there was a reasonable basis to foresee that a claim would be made.
An additional reason for the court’s decision in favor of TIG was that the policy provided coverage only for claims first made against a policyholder and reported in writing to the company during the policy period. In other words, the claim had to have been made during the period in which the policy was in force, and the notice had to be provided during that same time period, i.e., the standard notice requirement for claims-made coverage. The court concluded that TIG was correct that the letter from the attorney representing Carosella’s former clients constituted a claim within the terms of the policy. Therefore, the “claim” was made before the inception of the Carosella policy at issue.
Similar issues were addressed in ITC Investments, Inc. v. Employers Reinsurance Corp., where the correspondence from counsel sent before the policy inception on behalf of homeowners that asserted misrepresentations by the policyholder real estate firm constituted a claim and, accordingly, coverage was barred under a subsequent policy, and in Richardson Electronics, Ltd. v. Federal Ins. Co., in which the court held that there was coverage because a federal antitrust “investigation” was a “claim” notwithstanding the insurer’s argument that a “claim” had to involve a demand for the payment of money.
The Erroneous Belief That There Is No Covered Claim
Policyholders make the all too frequent decision not to give notice of what might be construed as a claim because of the mistaken belief that the claim is one that does not come within the policy’s coverage. If the policyholder’s analysis of the coverage issue is wrong, the consequences are dire--a failure to give timely notice that defeats coverage.
The policyholder’s mistaken view of when a claim triggered coverage is reflected in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Willis. National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”) filed a declaratory judgment action in Texas federal court in which it sought a determination that it had no obligation to provide coverage under directors’ and officers’ claims-made policies to defendant Mark A. Willis (“Willis”), an officer of EqualNet Communications Corporation (“EqualNet”), the purchaser of the policies.
The genesis of the coverage claim related to an action filed by CyberServe, Inc. (“CyberServe”), in which CyberServe asserted against Willis claims for, inter alia, fraud, fraud in the inducement, statutory fraud, tortious interference with contract, and conspiracy. After amending its complaint on several occasions, CyberServe amended the complaint again to assert a claim against Willis for negligent misrepresentation. With that amendment, EqualNet finally notified National Union of the CyberServe lawsuit.
The theory employed by Willis to obtain coverage was that it was not until the fourth amended complaint was filed and the negligent misrepresentation claim was added, that there was a claim covered by the policies at issue. Accordingly, Willis contended that notice was timely because the notice was provided within the time period permitted by the last claims-made policy sold by National Union to EqualNet. With respect to the principal argument of Willis that he was not in a position to provide a notice of claim until the filing of the fourth amended complaint, when a covered claim was first asserted against him, the court observed that there was support for his contention that for a claim or potential claim to trigger the notice requirement of the claims-made policy, it must relate to a type of loss actually covered by the policy.
With respect to National Union’s duty to pay defense costs, the court held that the applicable Texas law triggered a duty to reimburse defense costs when the pleadings alleged a claim that was “potentially” covered by the applicable policy. Applying that standard to the original complaint, the court observed that the complaint asserted that Willis made false representations either intentionally or recklessly without regard to their truth or falsity. The original complaint petition also alleged a tortious interference claim against Willis. While the National Union policy did exclude from coverage any “deliberate fraudulent act,” the court found that allegations of reckless conduct did not necessarily fall within the ambit of a deliberate fraudulent act and thus were not excluded. Additionally, tortious interference with contract could be deliberate or intentional but not necessarily fraudulent.
Thus, the court concluded that “when construing the insurance policy against exclusion of coverage, it does not appear that all the claims asserted against Willis in the original petition are excluded from the reach of the policy.” In the court’s view, it was therefore necessary for Willis to provide written notice to National Union of the claims or potential claims as soon as practicable within the first policy period when the original complaint was filed. Willis’ failure to do so foreclosed his right to coverage under that policy. Furthermore, the court concluded that Willis could not look to the 2000 claims-made policy for coverage because the claims in the fourth amended complaint filed in that year arose out of, were based upon, or were attributable to the pending litigation, or derived from the same or essentially the same facts as alleged in the prior litigation.
THE EXCLUSION FOR PRIOR RELATED LITIGATION OR CLAIMS
Frequently, claims-made policies contain an exclusion that bars coverage for a claim that is based upon, part of, or related to a prior claim or litigation on a prior claim. The obvious basis for this exclusion is that claims-made coverage is designed to provide coverage only for a claim that begins during the period of coverage of the policy at issue. The underwriting of claims-made coverage is based on the assumption that the relationship between policyholder and insurer begins with a clean slate or at least a slate with the disclosure of all potential claims. This permits the insurer to underwrite the coverage without fear of facing exposure from an unknown pre-existing claim. To a great extent, this exclusion is a product of the confusion that can exist, as reflected in the cases above, as to what constitutes a claim and when it was made. As the cases discussed below reflect, however, the application of the exclusion has spawned its own line of rulings.
Knowledge Of A Potential Claim As A Basis For Excluding Coverage
A California court addressed this issue in Low v. Golden Eagle Ins. Co., a case that involved a claims-made coverage dispute concerning a legal malpractice policy. In the underlying malpractice claim, an actress had retained a law firm (the “Wohlner firm”) to represent her in a suit against CBS for her wrongful termination from a television soap opera. The actress, Brenda Dickson, was dissatisfied with the representation of the Wohlner firm after her action was dismissed on summary judgment. This prompted her to write a letter to her attorney at the Wohlner firm in which she fired that attorney and expressed a number of grievances concerning the manner in which he had handled her case, including allegations of conflict of interest and failure to meet court scheduling dates.
Dickson retained new counsel and filed a malpractice action against the Wohlner firm and her former attorney in that firm. The Wohlner firm did not provide notice of Dickson’s claim to its malpractice insurer, Golden Eagle Insurance Company (“Golden Eagle”), until several months later. The Wohlner firm eventually settled the Dickson claim and assigned its putative rights under its malpractice coverage to Dickson as part of the settlement agreement. The insurance company, Golden Eagle, denied the coverage request because in its view the Wohlner firm had prior knowledge of the Dickson claim before entering into either of the policies issued to the law firm. Specifically, Golden Eagle relied on the exclusion in its policies that precluded coverage for an act or omission arising out of the law firm’s services prior to the policy period unless: “The Insured had no basis to believe that any such act, omission or Personal Injury might reasonably be expected to give rise to a claim . . . .”
The court held that this exclusionary prior knowledge language defeated Dickson’s claim against Golden Eagle. In the court’s view, the Wohlner firm had reason to believe that there were actions that might give rise to a claim against it when Dickson wrote to her attorney at the Wohlner firm, firing him and accusing him of various acts of legal malpractice, all of which took place before the inception of Golden Eagle’s coverage. In the court’s view, this sealed the fate of the coverage claim:
When the law firm received notice that its client was dissatisfied with its representation in the [Dickson] matter, coupled with an explicit threat of a lawsuit, the firm should have reasonably expected that the client’s dissatisfaction would give rise to a claim. The evidence available to Golden Eagle at the time it rejected the claim conclusively eliminated any possibility that the Dickson claim fell within the scope of coverage.
Prior Litigation And Related Claims
Another example of this form of claims-made coverage dispute arose in Lehigh Valley Health Network v. Executive Risk Indemnity, Inc. This was a declaratory judgment action brought by plaintiffs Lehigh Valley Health Network and Lehigh Valley Hospital (collectively “Lehigh Valley”) against three insurers, American Continental Insurance Company (“ACIC”), Travelers Casualty and Surety Company (“Travelers”), and Executive Risk Indemnity Corporation (“Executive Risk”), all of which had sold Lehigh Valley claims-made directors’ and officers’ coverage.
Lehigh Valley sought reimbursement from the defendants for the costs of two actions brought by Dr. Angelico, one that was filed in federal court and another filed subsequently in Pennsylvania state court. In 1994, Dr. Geoffrey Toonder brought an action against Lehigh Valley to compel Lehigh Valley to fill a manpower slot within his area of specialty, i.e. cardiothoracic surgery. Lehigh Valley and Dr. Toonder settled that case and under its terms the hospital again provided Dr. Toonder with a manpower slot. Dr. Toonder requested that Dr. Angelico be considered for that position. Lehigh Valley declined to consider the appointment of Dr. Angelico, and Dr. Toonder filed another action to enforce the settlement agreement that had ensued from the prior action. ACIC provided coverage to Lehigh Valley for both of the Toonder actions.
In 1996, Dr. Angelico sued Lehigh Valley, among other defendants, in a federal action in which he alleged that Lehigh Valley and the other defendants conspired to exclude him from the cardiothoracic surgery market in the Lehigh Valley area. In 1997, Dr. Angelico filed a separate complaint in Pennsylvania state court in which he raised many of the same allegations as had been raised in the earlier suit in Pennsylvania federal court.
The court’s decision focused on whether the Angelico claims were covered by any of the three insurers that had sold coverage to Lehigh Valley. Travelers maintained that the Angelico claims, although filed during the period of the Travelers and Executive Risk policies, actually arose from the original Toonder litigation and therefore fell within the earlier coverage of ACIC. The court rejected this argument, finding that there was no evidence in the record that Dr. Angelico gave written notice to Lehigh Valley of his intent to hold Lehigh Valley responsible during the time that the ACIC policy was in effect.
Travelers also argued that two exclusions in its policies--one for related claims and another for prior litigation--barred its liability to Lehigh Valley. The prior claims exclusion disclaimed coverage for all claims:
based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any fact, circumstance, or situation (a) underlying or alleged in any prior and/or pending litigation as of the Inception Date [of the policy], or (b) which has been the subject of any notice given before the Inception Date under any policy of insurance.
The related claims exclusion operated in a similar fashion and provided:
All claims based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions, or events shall be deemed to be a single claim made at the first time the earliest claim is made. A claim shall be deemed made when [Travelers] is notified . . . or when such claim is first made or asserted against an insured, whichever occurs first.
However, the court found those provisions to be ambiguous and held that Travelers’ interpretation of the policy was overly broad and sought to encompass too many claims in its exclusions. Specifically, the court found that the Angelico and Toonder suits were too dissimilar and “the nexus between them too attenuated” for coverage to be precluded as related to a prior claim or litigation. The court pointed out that the first Toonder suit did not even mention Dr. Angelico, and Dr. Angelico’s name was only inserted in the second Toonder action when Dr. Toonder sought to enforce the settlement agreement. Furthermore, the claims made by Dr. Angelico were much broader in scope than those asserted in the Toonder litigation. Thus, the court ruled that Travelers and Executive Risk were required to provide coverage to Lehigh Valley for the Angelico actions.
Whether a covered claim first was alleged in an amended complaint, or was excluded by the prior or related litigation exclusion, was addressed by a New York federal court in CheckRite Ltd., Inc. v. Illinois National Ins. Co., in which the policyholders avoided the prior or related litigation exclusion only to lose on late notice grounds. Plaintiffs CheckRite Ltd., Inc. and CheckRite California, Inc. (collectively “CheckRite”) sued defendant Illinois National Insurance Company (“Illinois National”) for coverage of CheckRite’s defense costs and expenses in the settlement of certain class action claims brought against CheckRite. CheckRite was in the business of collecting bad checks issued by consumers and was sued in a class action brought for alleged violations of the Fair Debt Collection Practices Act. The original class action was filed in 1993 against CheckRite. CheckRite provided notice to its then insurer, Employers Insurance of Wausau, and that insurer contributed all of its applicable coverage of $1 million to the defense and indemnification of CheckRite. Subsequently, in 1994, the named plaintiffs in the original action filed an amended class action complaint. This action was identical to the earlier complaint except that it sought relief for a class of consumers who had been injured within one year of the filing of the amended complaint. Again, the policyholder provided notice to Employers Insurance of Wausau, which provided defense and indemnification to CheckRite for the limits of its coverage under a separate policy.
In 1995, CheckRite purchased errors and omissions claims-made liability insurance coverage from Illinois National for 1995 through 1997. The Illinois National policies contained an exclusion which provided that the policies did not apply to claims that arose out of pending or prior litigation as of the inception date or retroactive date, if any, of the policy period or arose out of the same or essentially the same wrongful acts alleged in such pending or prior litigation.
In the underlying class action, the plaintiffs were permitted to file a second amended complaint in 1996 that expanded the class to include consumers affected by CheckRite's allegedly improper activities through December 31, 1996. CheckRite submitted a claim to Illinois National in February, 1997 when the Court allowed this amendment to the complaint. In response to this claim, Illinois National disclaimed coverage, basing its denial of coverage on the "pending or prior litigation" exclusion clause. Illinois National contended that CheckRite's claim arose out of litigation which commenced in 1993 and that the Illinois National policies did not apply to those claims which emanated from litigation predating its policies.
Illinois National contended that the second amended complaint, although it was filed during its policy period, was not a "claim made" during that policy period because it was part of the same judicial proceeding that had been filed several years earlier. The court rejected that argument. It pointed out that the second amended complaint added a fundamentally different set of plaintiffs and claims to the existing class action. The original class action before the second amended complaint sought to hold CheckRite liable for conduct occurring before the inception of the Illinois National policy. The second amended complaint in the class action expanded the period of claims and the plaintiffs potentially covered by the class action into the Illinois National period of coverage. Before the second amended complaint, there was no judicial proceeding against CheckRite in which it could have been subjected to damages to those persons who would be plaintiffs in the later period.
However, notwithstanding the fact that the second amended complaint in the class action did constitute a claim within the Illinois National 1995-1996 policy period, the court found that CheckRite had not provided notice of that claim within the same policy period and was therefore not entitled to coverage. CheckRite's first communication with Illinois National regarding the second amended complaint was in a letter dated February 20, 1997. The 1995-96 policy period had concluded three months earlier on November 1, 1996. CheckRite continued to have claims-made coverage with Illinois National, but that coverage was under a different policy, i.e., the 1996-97 policy.
Finally, CheckRite argued that it was entitled to coverage under the 1996-97 policy. Admittedly, it had provided notice to Illinois National in 1997, but as indicated above, the court held that the claim arose in the period of the 1995-96 policy. To circumvent that obstacle, CheckRite argued that the second amended complaint did not constitute a single claim but instead that each class member must be considered to have made a separate claim for purposes of the claims-made policy.  Indeed, CheckRite contended that the second amended complaint was forward-looking and anticipated the addition of new plaintiffs in the 1996-1997 policy period. Thus, the problem for the court was whether to treat the class action claim created by the second amended complaint as a single claim or multiple claims.
The court concluded that the most logical reading of the policy was to treat a class action claim as a single claim, rather than multiple claims. Indeed, the court stated that the correspondence between CheckRite and Illinois National indicated that CheckRite itself at the time considered the second amended complaint to be a single claim. For example, CheckRite did not forward to Illinois National any individualized information as to each of the claimants as they presented their claims in the action. Finally, the court rejected this aspect of CheckRite's argument by pointing out that its claim would be barred u