The difficulty with pure “claims made and reported” coverage – where the claim must both be made and reported during the policy period in order for coverage to be triggered – is that it can lead to harsh outcomes, as I have noted in prior posts. A recent unpublished Ninth Circuit decision, in which the court held that coverage was precluded for a claim made in one policy period but reported in a subsequent renewal period, provides yet another example of the kinds of harsh coverage outcomes that can sometimes under these kinds of policies. The Ninth Circuit’s August 22, 2017 opinion can be found here. The Wiley Rein law firm’s September 25 2017 Executive Summary Blog post about the decision can be found here.
Alaska Interstate Construction LLC (AIC) was insured under two successive E&O insurance policy with the same insurer. The first of the policies was in force for the period December 1, 2011 to May 1, 2013. The successive policy, a renewal of the first policy, was in force during the policy period May 1, 2013 to May 1, 2014. On January 10, 2013 – that is, during the policy period of the initial policy – AIC was sued by VC Sellers Reserve LLC. On July 19, 2013 – that is, during the policy period of the renewal policy – AIC provided notice of the VC Sellers Reserve lawsuit to its insurer.
In order to trigger coverage, AIC’s policies required both that the claim is made and that the claim is reported during the policy period. The insurer denied coverage for the lawsuit because the claim had been made in one policy period but reported in another policy period. AIC sued the insurer. The district court, applying Alaska law, held that the insurer was entitled to summary judgment because the claim was not made against AIC and reported to the insurer during the same policy period, as the policy required. AIC filed an appeal.
The August 22, 2017
In its August 22, 2017 unpublished per curiam opinion, a three-judge panel of the Ninth Circuit affirmed the district court’s ruling.
In seeking to have the district court’s decision overturned, AIC had tried to argue that when the policy referred to the “shown in the Declarations” could be interpreted to mean the Declarations pages of the two policies, and therefore that the policy periods of the two policies formed a single continuous policy period. The appellate court called this proposed interpretation “not reasonable” adding that under the plain language of the policies, a claim must be made and reported within a single policy period, “as stated in the Declarations for a given policy.”
The Court added that in this instance the claim was made during the policy period of one policy but that the notice was not provided until six months later, during the policy period of the renewal policy. “An insured,” the appellate court said, “cannot reasonably expect coverage under such circumstances.”
AIC attempted to rely on authority from other jurisdictions in which notions of “fairness” were invoked in order to imply an extended reporting period. The Ninth Circuit panel said with respect to this authority from other jurisdictions that “we predict that Alaska would follow the majority position and hold that, unless the policy language provides otherwise, renewals of claims-made policies generally do not extend claims reporting periods.”
Finally, the court rejected AIC’s attempt to rely on the provision allowing for extended claims reporting in the event of cancellation or non-renewal.
I will stipulate that even if the initial policy had provided for an extended reporting period, AIC’s provision of notice six months after the end of the initial policy’s policy period almost certainly would not have satisfied the requirements of the extended reporting provisions. Typically, even policies that allow reporting after the end of the policy period provide only a 60-day or 90-day window. AIC’s six month delay likely would have been insufficient even if its policy had included these kinds of provisions.
I will also stipulate that AIC’s argument that it had satisfied the notice requirement because the Declarations pages in the two successive policies in effect created a single continuous policy period was not likely to succeed. We all know that that is not how the Declarations page policy period provisions work and it was never going to be very likely that an appellate panel was going to be persuaded otherwise.
Insurers are, of course, completely within their rights to argue on their own behalf that their policies should be enforced as written, and the insurer here was undeniably within its rights to argue that the policyholder here had not complied with the express requirements to trigger coverage.
And of course, policyholders 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 in trying to realize the benefits of the insurance for which it had paid can be avoided, but it requires companies to have processes in place to make sure that their insurance interests are protected. As this case shows, the price of failing to do so is steep. As this case shows, even though the requirements under a claims made and reported policy can produce some harsh results, courts are prepared to enforce them. Companies should pay heed and conduct themselves accordingly.
All of that said, the way this case played out still gives me pause. Assume for a moment that the underlying claim otherwise would have been covered under the policy if AIC had only provided timely notice of claim. The company paid two successive premiums to buy insurance for the very kind of claim for which the company purchased the insurance. Merely because of the procedural formality of the timeliness of claims notice, the policyholder is deprived of all of the benefits under the policy for which it paid while the insurer is able to retain all of the premium. It could be argued that the notice defense provides the insurer with a windfall while the policyholder in effect experiences a complete forfeiture of its rights under the policy.
Of course, late notice can be unfair to the insurer – for example, when the notice arrives so late that the carrier’s interests are prejudiced. However, there is no suggestion here that the carrier’s interests were prejudiced. Instead, a carrier that accepted two successive premiums completely escaped its coverage obligations based on the delayed notice. Not because it was prejudiced, but because the notice was late.
There is a specific reason why this particular outcome gripes me. During the past eleven years of my career, I have been on the policyholder side of the equations, after more than two and a half decades on the carrier side of the aisle. What I now see clearly that I did not before is that late notice happens all the time. It happens because policyholders are busy with the ordinary business activities. In small companies, late notice happens because the person that knows about the claim is not always the same as the person that knows about the insurance. In a large company, the existence of the claim may not be communicated through corporate channels as might otherwise preferred. Late notice happens, that is all there is to it. Why is it acceptable that we have insurance mechanisms that can (and frequently does) effect complete forfeitures of policy rights in the face of the plain fact because human beings are involved the process is not always going to unfold as preferred or intended?
There is one more thing that bothers me about these kinds of cases. The courts in enforcing these harsh claims made and reported provisions often adopt a tsk-tsk moralizing tone that is almost always unwarranted. The Ninth Circuit is not as bad here as some other courts are in these kinds of situations, but it did go off base, as far as I am concerned, when it said “an insured cannot reasonably expect coverage under such circumstance.” Where is their authority for that? What makes them experts on what policyholders can reasonably expect?
You know what I think? I think a policyholder that pays two premiums for two successive policies and experiences a claim of the very type the policies were intended to cover has every right to expect that one of the policies would cover the claim and that mere procedural requirements should not effect complete coverage forfeitures and that mere procedural errors should not afford insurers a windfall.
The Ninth Circuit rejected the authorities on which AIC sought to rely in trying to argue on a “fairness” basis to imply an extended reporting provision. I am not sure I want to try to argue that the Ninth Circuit was wrong on this score; I am frankly uncomfortable with courts re-writing policies based on considerations external to the policy.
The problem is not that with the courts’ failure to apply fairness considerations; the problem is with the way the policies are written and operate. For my money, I would like to see that policy language modified to recognize that human beings are involved in this process. For example, the notice provision could allow for notice of claims during successive renewal policy periods in the absence of actual prejudice caused by the delayed provision of notice.
I suspect that some readers may disagree strongly with the views I have expressed here. I encourage readers to post their thoughts using the blog’s comment feature.