Among the key parts of a claims-made insurance policy are its definition of the term “claim” and its provisions specifying the policyholder’s notice of claim obligations. A recent Delaware Superior Court decision by Judge Eric Davis examined both of these basic policy features and considered what is required in order to meet the policy’s claim definition and in order for an insurer to raise late notice as defense to coverage. As discussed below, Judge Davis’s analysis raises some important considerations about these both of these basic policy features. Judge Davis’s September 29, 2016 opinion can be found here.
Background
Medical Depot is a medical device company. On June 18, 2013, Tony Messadri sent Medical Depot a letter (the “demand letter”) in which Mezzadri threatened to file a class action lawsuit if the company did not bring itself into compliance with California law. In March 2014, Messadri filed his initial complaint demanding injunctive and monetary relief on behalf of a group of the company’s customers. Messadri did not serve the initial complaint on Medical Depot. However, the company’s HR director received a copy of the unserved initial complaint from the company’s outside counsel. On September 2, 2014, Messadri served an amended complaint on Medical Depot. Medical Depot notified its D&O insurer of the amended complaint on September 9, 2014.
The D&O insurer had issued a series of two successive policies to Medical Depot, an initial policy issue for the period June 15, 2013 to June 15, 2014, and a renewal policy for the period June 15, 2014 to June 15, 2015. Thus, Messadri sent the demand letter and filed the initial complaint during the policy period of the first policy, and served Medical Depot with his amended complaint during the policy period of the renewal policy.
The D&O insurer denied coverage for the claim on the grounds that Medical Depot’s notice of claim was untimely. The insurer contended that the demand letter was a claim within the meaning of the policy and that the initial complaint and amended complaint were interrelated with the demand letter, and therefore the claim is deemed first made at the time of the demand letter. Medical Depot argued that neither the demand letter nor the unserved initial complaint were Claims within the meaning of the policy, and therefore that the claim was not first made until the amended complaint was served. Medical Depot filed a coverage lawsuit against the insurer in Delaware Superior Court. The parties filed cross-motions for summary judgment.
The D&O insurance policy defined the term claim to mean, in relevant part, as “1. A written demand for monetary relief; 2. A civil or administrative, regulatory or arbitration proceeding for monetary relief which is commenced by: a. Service of a complaint of similar pleading.”
In addition the policy also provided that as “a condition precedent to the Insurer’s obligation” to pay, the Insured must give written notice of claim to the insurer “as soon as practicable after such Claim is first made, but in no event shall such notice be given later than thirty (30) days after the expiration date or any earlier cancellation date of this policy.”
The policy also included a “New York Regulation 121 Disclosure Supplement” that, among other things, specified (the original is all in capital letters) that: “coverage is provided for liability only if the claim for damages is first made against the insured and reported to us in writing during the policy period, any subsequent renewal, and any applicable coverage period.”
The September 2016 Decision
In a September 29, 2016 opinion, Judge Eric Davis, applying Delaware law, granted in part and denied in part each party’s motion for summary judgment. Specifically, he held that the demand letter did not constitute a claim; that the initial complaint did constitute a claim; that Medical Depot did not provide timely notice of claim of the initial complaint as required under the initial policy, but that, because the policy was renewed and because of the continuous claims-made nature of the insurer’s relationship with the company, the claim “falls within the Policy’s coverage period,” as a result of which the insurer can deny coverage for the claim based on untimely notice only if the insurer is able to show that it was prejudiced. Judge Davis concluded that because genuine issues of material fact exist as to whether or not the insurer was prejudiced, he could not rule on the notice of claim issue.
In concluding that the demand letter did not constitute a claim, Judge Davis noted that while the letter uses the word “demand” four different times, it never demanded money. Because it was not a written demand for monetary relief, the demand letter did not meet the policy’s definition of a claim.
The initial complaint did present a written demand for monetary relief. Medical Depot argued that it did not meet the policy’s definition of claim because it had never been served on the company. Judge Davis noted that the definition of claim can be met in several different ways. He noted that “a Claim can be a written demand, a served complaint or a notice of charges.” The Policy, he said, “does not exclude an unserved complaint for monetary damages from the definition of Claim.” So, even though the initial complaint was not served on Medical Depot, the initial complaint is “a written demand for monetary relief” and there is a claim within the meaning of the policy. If it has been served, it also “also would have constituted a civil proceeding commenced by service of the complaint.”
In analyzing the notice issue, Judge Davis focused first on the claim-made nature of the policy. He specifically considered the language from the N.Y. Disclosure Supplement, which stated that coverage applies under the policy only if the claim is reported to the insurer “during the policy period, any subsequent renewal and any applicable discovery period.” Because of the renewal, there was a “claims made relationship” between Medical Depot and the insurer during the duration of the policy periods of the two policies, and coverage exists if it is made and reported to the insurer “during the policy period, any subsequent renewal period and any applicable discovery period.”
In light of these considerations, Judge Davis concluded that while Medical Depot did not comply with the policy’s requirements to provide notice of claim “as soon as practicable” or within 30 days of the policy’s expiration Medical Depot did provide notice of claim during a “subsequent renewal.” Judge Davis said “given that the language of the Policy and the fact that the policy was renewed, Medical Depot has every reason to expect that Claims made during the claims-made relationship will be covered.”
Judge Davis also said that the insurer’s argument that a claim that was “discovered but not reported during the policy period then reported during the renewal policy’s policy period but not covered under either” would “defeat” Medical Depot’s reasonable expectations. He added that “Delaware law abhors forfeiture where to do so would deny the insured the very thing paid for,” noting further the insurer’s “purely technical position defeats the clearly contracted for relationship between the parties.”
Based on this analysis, Judge Davis concluded that, where, as here, the policyholder has renewed a claims made policy and provided notice of claim during the renewal policy period, the insurer can only deny coverage based on untimely notice if it is able to show that it was prejudiced by the untimely notice. Because the parties had not addressed the question of prejudice in their summary judgment papers, Judge Davis denied the parties’ cross-motions in the notice issue.
Discussion
I suspect that some insurer-side advocates may find the outcome of this case surprising. At least the more literal-minded advocates may find the fact that Judge Davis did not conclude that coverage was barred even though Medical Depot’s provision of the notice of claim clearly was untimely to be unexpected. However, while it does not feature expressly in Judge Davis’s analysis, there is authority and precedent supporting his approach, particularly for his consideration of the claim made nature of the coverage at issue and his conclusion that the insurer must show prejudice in order to rely on late notice as a defense to coverage.
The topic heading for this discussion is the so-called notice prejudice rule, which requires an insurer to show that it was prejudiced by the late notice in order to assert that an untimely of notice of claim bars coverage. The usual analysis is that the notice prejudice rule applies to occurrence policies but not to claims made policies. However, as discussed here, some states allow the notice prejudice rule to apply to claim-made policies where (a) the underlying claim was made during the term of one policy, (b) the insured was thereafter continuously insured under renewals of that policy and (c) the insured provided notice during one of those renewal terms. Judge Davis did not expressly refer to these principles but his reasoning brought him to the same place in any event. (To be sure, not all court have followed these principles, as noted for example here.)
As I have previously detailed at length (here, for example), my own personal view is that the notice prejudice rule should always apply to late notice claims. To paraphrase a portion of Judge Davis’s opinion (in which he quoted Judge Cardozo), to deny coverage for late notice where the insurer has not been prejudiced would “visit venial faults with oppressive retribution” – particularly, where, as here, the insurer collected two successive premiums and was continuously on the coverage during the time when the claim was made and notice was provided.
During my recent visit to Australia, I learned that the notice prejudice rule has been adopted into law in that country; there, by statute, an insurer can only deny coverage for late notice if it is able to demonstrate prejudice. I have to say I favor the adoption of this type of law, although with fifty states involved in this country, it would be a challenge to put into effect. Even without these statutory requirements, some insurers have modified their forms to include a provision along these lines:
If the Insured fails to provide notice of 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.
If the carrier-side attorneys might have been a little surprised by the outcome of the untimely notice issue analysis, I think the policyholder-side advocates might have been surprised by Judge Davis’s analysis of the definition of claim issues. Specifically, I suspect some might have been surprised to find that a complaint that had not been served could constitute a claim notwithstanding the claim definition’s reference to a civil action commenced by service of a complaint. Judge Davis’s analysis is a reminder that the various parts of the definition of claim are not mutually exclusive, and that where, as here, an unserved complaint represents a demand for money or services, it constitutes a claim notwithstanding the fact that it wasn’t served.
There is a troubling aspect to this analysis; here, the company’s HR director happened to know about the existence of the unserved complaint, but how would this have worked out if no one at the company knew about the existence of the unserved complaint? I suppose in that case you could argue that if no one at the company knew about it, it wasn’t really a “demand” on the company. I suppose the company could also argue that if it didn’t know about is an unserved complaint, it could not possibly have been said to have provided late notice because it is not possible to provide notice “as soon as practicable” of something that you didn’t even know about.
The problem for those of us on the policyholder side is that the multipart structure of the definition of claim could create a trap for the unwary; one might, for example, conclude that because a complaint had not been served that it was not yet a claim, omitting to consider that because the unserved complaint represents a monetary demand it nevertheless constitutes a claim.
The trap-for-the-unwary aspect of this is one of the many reasons why I think the notice prejudice rule should always apply – one of the many reasons why late notice happens is that it is not always apparent to the people involved that what has happened represents a claim. Sometimes it is not apparent to them at all. Under those circumstances, notice to the insurer may not happen on time. But if the delayed notice did not prejudice the insurer in any material way, why should coverage be forfeit?