The difficulty with pure “claims made and reported” insurance coverage was put into sharp relief in a recent decision out of the South Carolina federal court. The question before the court was whether there is coverage for a claim made during the policy period of one claims made and reported policy but not reported to the insurer until the subsequent renewal policy period.
In a July 9, 2013 opinion, District of South Carolina Judge Cameron McGowan Currie, applying South Carolina law, held that the notice in the subsequent policy period was untimely and therefore that there was no coverage for the claim made during the prior period. A copy of Judge Currie’s opinion can be found here.
GS2 Engineering and Environmental Consultants purchased a series of six one-year professional liability insurance policies from the same carrier. The key policy periods for purposes of the insurance dispute are the last two renewal policies, which covered the period August 7, 2009 to August 7, 2010 (the “2009 Policy”) and August 7, 2010 to August 7, 2011 (the “2010 Policy”). Both of these policies were claims made and reported policies, and both contained this language in their introductory paragraphs:
This is a claims made and reported policy …. This policy has certain provisions and requirements unique to it and may be different from other policies an “insured” may have purchased …. “Claims” must be first made against the “insured” during the “policy period” and “claims” must be reported, in writing, to us during the “policy period”, the automatic extended reporting period or the extended reporting period, if applicable.
The policies provided coverage for claims arising from specified services, when the following criteria were met:
Such act, error or omission must commence on or after the “retroactive date” and before the end of the “policy period” and the “claim” is first made against the “insured” during the “policy period” and reported to us during the “policy period”, the automatic extended reporting period or the extended reporting period, if applicable.
The policies’ extended reporting provisions (ERP) provided as follows:
IV. Extended Reporting Period
A. You shall be entitled to an automatic extended reporting period without additional charge upon termination of coverage as defined in this section. This period starts at the end of the “policy period” and lasts for thirty (30) days.
B. In addition to the automatic extended reporting period you shall be entitled to purchase an extended reporting period of up to three (3) years in duration upon termination of coverage as defined in this section …
E. For the purposes of this automatic extended reporting period and the Extended Reporting Period endorsement, termination of coverage means any cancellation or nonrenewal of this policy except for fraud or material misrepresentation, a material change in the nature or extent of the risk or nonpayment of premium.
Richland School District filed a lawsuit against GS2. The lawsuit was served on GS2’s counsel on April 14, 2010, nearly four months before the expiration of the 2009 policy. The 2010 policy went into effect on August 7, 2010. The insurer received its first notice of the lawsuit from Richland School District on September 23, 2010 – roughly 47 days into the 2010 policy period – when the school district’s counsel sent the carrier a copy of the summons and complaint. GS2 itself first communicated with the insurer about the claim on November 12, 2012, in response to an October 6, 201o inquiry from the insurer.
The insurer disclaimed coverage for the claim and coverage litigation ensured. The insurer moved for summary judgment.
The July 9 Opinion
In his July 9 opinion, Judge Currie, applying South Carolina law, granted the defendant insurance company’s motion for summary judgment.
Judge Currie preceded her discussion of the legal issues by noting that because GS2 had renewed its policy, it was not eligible either for the automatic thirty-day ERP or purchase of a longer ERP. She also noted based on the facts recited above that GS2 had not both received and reported the claim during the same period.
Judge Currie stated that the question before her was how the claims made and reported provisions of the policies should be applied where the insured is covered under a series of renewal policies that contain extended reporting period provisions that are unavailable in the event of renewal.
GS2 cited several court decisions in which courts had found the claims made and reported policy language to be ambiguous, construed the language in the favor of the insured, and held that the renewal of the particular policies before the court resulted in an extension of the reporting period from one policy year into the subsequent year. Among other things these cases discussed the expectation of continuous coverage created by the series of renewals.
The insurer, in turn, cited multiple cases that supported the conclusion that the renewal of a claims made and reported policy does not modify the requirement that claims be reported in the same policy period in which they are made unless an ERP applies.
After reviewing the cases, Judge Currie concluded that the cases the defendant cited “better reflect the nature of the policies at issue and their actual language.” She concluded 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….Even if the court were to find the ERP provisions … ambiguous, it would, at most, construe them to extend the automatic thirty-day ERP to renewed policies. Under the facts of this case, that would not lead to a different result as the claim was first reported to the insurer more than thirty-days after the close of the 2009 Policy Period, which is the policy period in which the claim was made.
Accordingly, Judge Currie rejected GS2’s argument that all of the policies should be treated as a continuing policy or that the 2009 policy’s reporting period should be extended into the 2010 policy. She granted the insurer’s motion for summary judgment.
The requirements of a pure claims made and reported policy are harsh. This is most obvious in the context when a claim is made just before the claims made and reported policy expires. Picture, if you will, a claim that arrives on the final day of the policy period, the day before the policy renews. Even in the exercise of the utmost effort, the policyholder might not be able to get the notice of the eleventh hour claim to the insurer before the policy expiration. Yet, if the principles of this case were applied to that situation, there would be no coverage for the eleventh hour claim, an absurd result that cries out for some practical accommodation. The universal expectation under those circumstances, I think, would be that the carrier should accept the notice after the policy renewal to avoid a manifestly unfair outcome. (Maybe some particularly hard-hearted claims professionals would reject any accommodation, but I think most fair-minded people would expect the accommodation).
If you accept for the sake of discussion that some accommodation would have to be made in the case of the eleventh hour claim, why isn’t it right to expect some accommodation where as here the time gap was greater? The response likely would be that the policyholder was not diligent in fulfilling its notice obligations under the policy and therefore should not receive any accommodation.
Here’s the problem for me anytime I look at an insurance coverage dispute involving notice issues – late notice happens. I have seen it over and over again during the course of my many decades in this business. Even the most diligent company may blow a notice deadline. Smaller companies don’t always have personnel focused on insurance issues. Larger companies have difficulties when claims information is not communicated up through the organization. Companies are focused on making goods and delivering services. As a result, from time to time they may – and in my experience often do – fail to attend to insurance notice obligations in a timely manner.
Often the analysis of a failure to provide notice issues takes on a judgmental tone, as in “it is the company’s own fault for failing to give notice” or something like that. But notice is not a moral issue, it is purely procedural. It is the means by which the insurer is advised that a situation has arisen in which its policy may be implicated. Of course, late notice can be unfair to the carrier – for example, if notice arrives so late that the carrier’s interests are prejudiced. But there was no suggestion here that the carrier’s interests were prejudiced. Instead, a carrier that accepted a succession of six annual renewal premiums and that undeniably was on the risk when the claim was made escaped its coverage obligations based on the delayed notice. Not because it was prejudiced, mind you, but simply because the notice was late.
In many current policies, the harsh edges of claims made and reported requirements have been ameliorated somewhat. Many policies now require notice only “as soon as practicable” and provide a post-expiration period of 60 or as many as 90 days in which claims may be reported. These policies are more practical because they recognize the reality that even when a company is diligent, it may not provide notice right away.
These more accommodating notice provisions underscore the ultimate problem here, which is that the policy here was a pure claims made and reported policy. As this case with its harsh outcome demonstrates, pure claims made and reported policies are unfavorable to policyholders and should be avoided where possible. There are of course certain insurance products, or certain companies in certain industries, for which a pure claims made and reported policy may be the only availlable option. (Please note that I am expressing no opinions about the placement of this policy; I have no way of knowing what options might have been available to this insured or what other considerations might have entered into the policy placement.)
There is of course another lesson from this case (as my friends on the carrier side would no doubt be quick to point out), and that is that companies must be attentive to their interests and do everything they can to try to preserve all of their rights under their insurance policies. The problems this company encountered here can be avoided, but it requires companies to have processes in place to make sure that their insurance interests are protected. As this case show, the price for failing to do so is steep. As this case also shows, even when notice requirements can produce harsh results, courts are prepared to enforce them. Companies should pay heed and conduct themselves accordingly.
I know some readers may have some strong views about these topics and my comments. For all I know there may be some real fans of pure claims made and reported policies out there. I encourage readers to post their remarks using this blog’s comment feature.