Among the perennial coverage issues arising under D&O and E&O policies are questions involving timely notice of claim. Recently, the notice provisions many professional liability insurance policies relating to notice timeliness have been revised to lengthen the time period within which notice must be given and even specifying that if in order to assert late notice of claim, an insurer must demonstrate that it has been prejudiced by the late provision of notice. In the following guest post, industry veteran and well-known insurer-side coverage attorney Joseph P. Monteleone of the Rivkin Radler law firm takes a look at these policy wording changes as well as the case law context within which these changes have arisen.
I would like to thank Joe for his willingness to publish his article on this blog. I welcome guest post submissions from responsible authors on topics of interest to readers of this site. Please contact me directly if you are interested in submitting a guest blog post. Here is Joe’s guest post.
One of the hallmarks of a claims-made and reported policy historically has been the two-pronged requirement that (1) the claim against the insured must be first made during the policy period, and (2) the claim had to be reported to the insurer, if not strictly within the policy period, at least no later than a “bright line” cut-off date after policy expiration. These cut-off dates were generally thirty (30) or sixty (60) after policy expiration.
Contrast these with so-called pure claims-made policies, which have the first of the two-pronged component discussed above, but the reporting requirement is typically “as soon as practicable”[i], similar to reporting requirements under occurrence-triggered policies such as the Commercial General Liability (CGL) policy.
As part of the inexorable trend of policy wordings becoming ever broader for the benefit of the policyholder, notwithstanding any hardening or softening of rates for the policies, we have seen significant modifications to the policy reporting provisions.
First, the period of time within which to report a claim to the insurer has been lengthened. Few policies now require that the claim be reported within the policy period, an admittedly harsh requirement when a claim may be first made against the insured on the last day of the policy period or sometime close to that date. While sixty (60) days was quite common for a while, more recent policy forms have extended this to as much as one hundred eighty (180) days.
Second, many policies now provide that the time within which an insured must report a claim to the insurer does not begin to run until either a risk manager or the general counsel knows of the claim. Like the lengthening of the time to report discussed above, this also protects insureds in large organizations where claims are received in branch offices and it takes some time for the claim to come to the attention of those in a position to report it to the insurer.
The final and most recent evolution has taken place largely in D&O policy forms. Specifically, the insurer, by virtue of the policy language, now assumes the burden of proving that it was prejudiced by any late notice before it can disclaim coverage on this basis. Prototypical language incorporating all of these changes follows.
With respect to and provided always that any Claim is first made against an Insured during the Policy Period, the Insured shall give written notice to the Insurer of such Claim as soon as practicable after either the in-house general counsel, risk manager or functional equivalent of either of the foregoing within the Company first becomes aware of it, but in no event later than one hundred eighty (180) days after the end of the Policy Period.
If the Insured fails to provide notice of any such Claim to the Insurer as required under this Section, the Insurer shall not be entitled to deny coverage for the Claim based solely upon late notice unless the Insurer can demonstrate that its interests were materially prejudiced by reason of such late notice.
(emphasis added; boldfaced terms defined in the Policy)
There has been little in the way of case law that would have mandated the changes in length of the reporting period and who in the insured organization must have notice of the claim before the reporting obligation incepts. Indeed, courts have upheld reporting periods strictly “during the policy period”[ii] and as little as sixty (60) days post-policy expiration.[iii] When one gets to the point of a 180 day reporting period, dependent upon when the claim is first made against an insured, the policyholder may have as long as a year and a half to report that claim to the insurer. In many such cases, it is not inconceivable that a litigated claim may have reached the trial stage by that time.
With regard to the voluntary assumption of a prejudice burden, we have the anomaly of insurers offering an enhancement to their policyholders that the trend in recent case law has held that they need not do. In this article, we will focus on many of those recent cases.
THE LAW IN NEW YORK
New York has addressed this issue by statute[iv] since 2009, but there have been a few judicial decisions that have interpreted it. Perhaps the leading decision thus far is one from the Second Circuit applying New York law, Indian Harbor Ins. Co. v. The City of San Diego.[v]
This case involved a claims made and reported pollution liability policy that was not delivered to the policyholder or issued by the insurer in New York. The policy, however, contained both New York choice of law and forum selection provisions. The policy had no “bright line” reporting cut-off date, but rather required reporting “as soon as practicable”, rendering it more akin to a pure claims made policy.
3429 (a) (5) provides as follows:
(a) No policy or contract insuring against liability for injury to person . . . or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions . . .
. . . .
(5) A provision that failure to give any notice required to be given by such policy within the time period prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer . . . .
Because the policy was neither issued nor delivered in New York, the Court declined to apply § 3429 (a) (5) in favor of the insured and instead upheld the insurer’s denial of coverage based upon a 58-day delay in giving notice.
Interestingly, New York law on late notice cuts both ways in that there is another provision in its statutory law governing the time period within which an insurer must advise of its denial of coverage.[vi] This code section, however, is somewhat limited in scope in that it only applies to bodily injury or death claims arising from an accident occurring within New York and policies issued or delivered there. Under this law, an insurer is required to provide written notice of the bases upon which it is denying coverage “as soon as is reasonably possible.” As virtually no D&O policies and many E&O policies do not afford bodily injury coverage, § 3420(d)(2) is of limited concern to professional liability insurers, aside from the healthcare and design professional sectors.
THE LAW IN NEW JERSEY
We should expect a high court ruling in New Jersey very soon as the Supreme Court of the State of New Jersey just heard oral argument on October 14, 2015 in Templo Fuente De Vida Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA.[vii]
Templo Fuente involves a mortgage broker’s E&O policy written on a claims-made and reported basis. The underlying suit was not reported to the insurer until approximately six (6) months after it was served, but it was reported during the policy period. The underlying claimant has argued that there is no evidence of prejudice to the insurer and, in any event, it is irrelevant in this case, as the policy provided for reported as soon as practicable during the policy period, and that condition was satisfied. Thus, they are distinguishing the landmark 1985 decision in Zuckerman v. Nat’l Union Fire Ins. Co.[viii] where the claim was not reported until after expiry of the policy.
Thus, pending review and possible reversal by the Supreme Court, New Jersey is squarely in the camp of pro-claims-made and reported insurer by not requiring the establishment of prejudice. Indeed, Templo Fuente is presently very favorable because it found late notice despite the fact that the claim was reported during the policy period (the outside limitation, or bright line cut-off), but not as soon as practicable (inside limitation) during that period. It’s not that the courts undertake a subjective analysis in construing what is as soon as practical, but rather the analysis is much simpler in determining whether the reporting took place after the expiration of a bright line cut-off.
THE LAW IN OTHER JURISDICTIONS
It is beyond the scope of this paper to present an exhaustive 50-state summary of the law on this issue, but we will list some of the more recent decisions in select jurisdictions.
Most courts outside New York and New Jersey in recent decisions have declined to apply the notice-prejudice rule to claims made and reported policies.
Thus, a chart of select recent cases in jurisdictions outside New York and New Jersey upholding the reporting provision in a claims-made and reported policy without imposing a burden on the insurer to establish prejudice would be as follows.
|Arkansas||Dardanelle & Russelville R.R. v. Certain Underwriters at Lloyd’s, London, 379 S.W. 3d 734 (Ark. Ct. App. 2011)|
|California||Brenegan v. Fireman’s Fund Ins. Co., 2d Civil No. B254760 (Cal. Ct. App., April 21, 2015)|
|Colorado||Craft v. Phila. Indem. Ins. Co., 343 P.3d 951 (Colo. 2015)|
|Florida||ABCO Premium Finance LLC v. Amer. Int’l Grp Inc., (S.D. Fla., August 9, 2012), aff’d on other grounds, (11th Cir., April 9, 2013)|
|Kentucky||C.A. Jones Mgmt. Group v. Scottsdale Indem. Co., (W.D. Ky. March 25, 2015)|
|Texas||Nicholas Petroleum, Inc. v. Mid Nicholas Petroleum, Inc. v. Mid-Continent Cas. Co., No. 05-13-01106 –CV (Texas App., 5th Dist. July 21, 2015)|
|Washington||Great American Ins. Co. v. Sea Shepherd Conservation Soc., No. 13-cv-1017, (W.D. Wash., May 23, 2014)|
|Wisconsin||Anderson v. Aul, (Wis. February 25, 2015)|
THE LONG-TERM IMPACT OF THE POLICY LANGUAGE CHANGE
Once a liberalizing provision becomes commonplace in policy forms, it is difficult for insurers to revert to an earlier more restrictive version of the provision, even where market conditions have otherwise arguably hardened. Witness what has happened over the past several years with respect to intentional acts exclusions[ix] and the requirement that excess policies have no payment obligation unless and until the underlying insurance is exhausted by actual payments by those insurers.[x]
That being said, insurers may still have an opportunity to readdress the prejudice requirement in policies, as it is only a very recent phenomenon and still largely confined to D&O policies. It is rare to find such a provision in other claims-made and reported forms.
The twin questions then are whether insurers will so act and whether they should act. As to the first question, the answer will depend largely on the marketplace and the sway of major insurance brokers, whose rightful role is to protect the interests of the policyholder. The second question is a bit trickier because the prejudice requirement may give rise to whole new round of disputes between insurer and policyholder.
How does an insurer proceed to prove it was prejudiced by late notice? Does notice on the eve of trial, such that a reasonable settlement opportunity may have been lost, constitute prejudice? Must the insurer establish that it would have handled the litigation differently? Does the fact that the insurer may have renewed the policy at a premium level favorable to the insured believing there were no claims establish prejudice? What about the fact that the insurer may not have renewed at all, but for the fact of no claims?
Perhaps the number of cases involving disputes over late notice prejudice only underscores the notion that introducing these provisions into the policies may prove problematical to insurers and policyholders alike. Nonetheless, it is unlikely that the insurance marketplace will easily allow for reversion to policy language that does not impose the burden of proving prejudice on the insurer.
Once the insurance marketplace accepts a policy wording that broadens the coverage, such as the case with a self-imposed prejudice standard, it is very difficult for insurers to pull it back, even if the insurance marketplace otherwise “hardens” in terms of rate and premium increases. That being said, the imposition of notice-prejudice standards is of relatively recent vintage, and there may still be time to reverse the trend in wordings. Of course, that begs the ultimate question as to whether there should be a reversal of the wording trend in light of the prevailing case law.
To paraphrase a certain cable TV news network, we have reported, now you decide.
Joseph P. Monteleone is a partner in the Hackensack office of Rivkin Radler LLP, where he practices primarily in insurance coverage with a concentration in directors’ and officers’ (D&O) and professional liability.
[i] Claims made and reported policies also frequently incorporate an “as soon as practicable” reporting requirement, but it is an “inside limitation”. In other words, the claim must be reported as soon as practicable, but subject always to the “outside limitation” of sixty days after policy expiration or other bright line cutoff.
[ii] See, Gulf In, Fertig & Curtis, 433 So. 2d 512 (Fla. 1983); Zuckerman v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 495 A. 2d 512 (N.J. 1985)
[iii] See, Continental Cas. Co. v. Black, Sims & Birch, LLP, 10-cv-1290, (M.D., Fla., December 14, 2011)
[iv] New York Insurance Law § 3429 (a) (5)
[v] 2014 U.S. App. LEXIS 18986 (2d Cir., October 2, 2014)
[vi] New York Insurance Law § 3420(d)(2)
[vii] Case No. 074572. The intermediate appellate court, the New Jersey Appellate Division, held that the insurer need not establish prejudice in order to prevail on its late notice defense, although New Jersey law applies a prejudice standard in the case of occurrence-based policies. No. A-4516-1211 (June 6, 2014).
[viii] 495 A.2d 395 (N.J. 1985)
[ix] Today, these exclusions are pretty much inapplicable unless and until there has been a final adjudication of liability, that adjudication takes place in the underlying litigation, and is no longer appealable. The practical import of this is that the exclusion can rarely be applied, as even a settlement after a lengthy appeal process takes the claim outside the scope of the exclusion, and the intentional misconduct cannot be established in a collateral proceeding brought by the insurer.
[x] See, e.g., Comerica Inc. v. Zurich Am. Ins. Co., 498 F. Supp.2d 1019 (S.D. Mich. 2007); Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 73 Cal. Rptr.3d 770 (Cal. Ct, App, 2008), but see, Maximus, Inc. v. Twin City Fire Ins. Co., 856 F. Supp.2d 797 (E.D. Va. 2012); Comerica Inc. v. Zurich Am. Ins. Co., 498 F. Supp. 2d 1019 (S.D. Mich. 2007)