In a recent decision in an insurance coverage dispute, a federal court applying Puerto Rico law concluded that there was no coverage under a management liability insurance policy for a discrimination claim that had first been made prior to the policy period of the claims made policy at issue, and that notice of the claim was untimely as well. The court’s conclusion is in a sense unremarkable. What is worth considering about the ruling is how often these same problems recur, as discussed below. The District of Puerto Rico’s May 28, 2020 opinion can be found here. A June 17, 2020 post on the Wiley law firm’s Executive Summary Blog about the decision can be found here.
Background
On June 30, 2016, Yadira Galaraza-Cruz sent a written to her employer a written request for monetary compensation to settle her workplace discrimination claim. On July 11, 2016, Galaraza filed a charge of discrimination against her employer before the Anti-Discrimination Unit of the Puerto Rico Department of and Human Resources and the Equal Employment Opportunity Commission (EEOC). On May 8, 2017, Galaraza filed a lawsuit against her employer in the United States District Court for the District of Puerto Rico. The complaint in the federal court lawsuit incorporated the same claims of sexual harassment and discrimination Galaraza had presented in her demand letter and in her administrative charge of discrimination.
On June 15, 2017, the employer notified its management liability insurer of the filing of the complaint. This notice was the employer’s first report to the insurer of Galaraza’s claims of sexual harassment and discrimination. At the time, the employer maintained a management liability insurance policy with a policy period of December 31, 2016 to December 31, 2017. The insurer denied coverage for the claim, contending that the claim had first been made at the time Galarza sent her demand letter – that is, prior to the policy period of the employer’s then–current policy. The insurer also contended that the employer had not provided timely notice of the claim.
Galarza amended her complaint to name the employer’s insurer as a defendant, under Puerto Rico’s direct action statute. The insurer filed a motion for summary judgment.
Relevant Policy Language
The policy specifies that it “covers only claim first made against the insureds during the policy period or discovery period if applicable, and reported to the insurer as soon as practicable but in no event later than 60 days after the end of the policy period or discovery period if applicable.”
The policy defines the term claim to mean: “(a) a written demand for monetary or non-monetary relief against an Insured person or with respect to Insuring Agreement 1.3, against the Insured Organization; (b) a civil or criminal arbitration proceeding against an Insured Person or, with respect to Insuring Agreement 1.3 against the Insured Organization; (c) an arbitration or formal administrative or regulatory proceeding against an Insured Person or, with respect to Insuring Agreement 1.3, against the Insured Organization, including but not limited to a proceeding before the Equal Employment Opportunity Commission, or similar state agency.”
Finally , the policy provides that “All Claims arising from the same Wrongful Act or Interrelated Wrongful Acts shall be deemed one Claim and subject to a single limit of liability. Such Claim shall be deemed first made on the date the earliest of such Claims is first made, regardless of whether such date is before or during the Policy Period.”
The May 28, 2020 Opinion
In a May 28, 2020 Opinion, District of Puerto Rico Judge Raul M. Arias-Marxuach granted the insurer’s motion for summary judgment. In granting the motion, Judge Arias-Marxuach ruled that Galaraza’s initial written request for monetary compensation “was a written demand for monetary relief” and therefore “constitutes a ‘claim’ pursuant to the Policy’s definition.” The written request, the administrative charge, and the subsequent employment practices lawsuit complaint “all of which allege the same wrongful acts, constitute a singular claim initially made on June 30, 2016.”
Accordingly, Judge Arias-Marxuach said, “the claim reported … during the policy period of December 31, 2016 to December 31, 2017 was not first made by Galaraza during such policy period.”
Judge Arias-Marxuach rejected the employer’s argument that the insurer was estopped from denying coverage based on the failure to notify the insurer because past practices over the course of years had established that the employer would only notify a claim with a judicial complaint was served. Judge Arias-Marxuach said that “this practice would not perforce contradict the terms the policy,” and cited language from a prior First Circuit opinion to the effect that “it is no appropriate part of judicial business to rewrite contracts freely entered into.” The terms of the policy are “clear and unambiguous” and the employer “did not comply with an essential requirement for coverage.”
Discussion
I decided to write about this decision not necessarily because there is anything remarkable or noteworthy about the court’s ruling. Indeed, given the facts and policy language, the outcome really is entirely unremarkable. The reason I decided to write about it is that this outcome is all too common. Policyholders regularly run afoul of the claims made date and timely notice requirements of their policy. These problems are so common that they represent something of a theme on this blog.
One of the reasons policyholder run into these problems is that many non-lawyers think of a claim as a lawsuit. However, under the provisions of most management liability insurance policy, the definition of the term claim is much broader than and encompasses more than just lawsuits. Under this broad definition, a claim can include a demand, an administrative matter, and so on. The broad definition of claim generally found in most management liability insurance policies these days represents a valuable coverage enhancement for insureds. However, the broad definition of claim can also create a trap for the unwary, as policyholders may fail to recognize other circumstances as both falling within the definition of claim and triggering the notice requirement. For example, as here, a policyholder might fail to recognize that a demand letter is a claim within the meaning of their management liability insurance policy.
One particular recurring circumstance in which policyholder fall into this trap has to do with EEOC charges or their state equivalent. I can’t tell you how many times during my career I have seen situations where a policyholder failed to recognize that an EEOC charge or state equivalent is a claim under the policy and so did not provide notice of the administrative charge to their insurer. When the subsequent lawsuit later comes in, all too often the policyholder will find that the insurer will contend that there is no coverage for the subsequent lawsuit because of the failure to provide notice of the prior administrative charge.
I have frequently returned to these claims made date and late notice issues on this blog for the simple reason that these problem arise over and over and over again. I have not done a scientific survey, but is it my general impression that these issues are the most frequent ground on which policyholders have coverage for their management liability insurance claims denied.
I know that it is incumbent on policyholders to be diligent in protecting their interests (as I have in fact emphasized on this blog), and I will even concede that insurers have legitimate points to make about the importance of timely notice. However, the fact that these same problems recur over and over and over again really troubles me. Sooner or later it starts to feel to like a flaw with the way the insurance works. When so many commit the same user error, the problem isn’t the users, the problem is the product itself.
For that reason, I am a strong proponent of the notice prejudice rule. If insurers are so keen on trying to exploit a feature of their product to try to evade their contractual obligations, their ability to rely on late notice to deny coverage ought to be limited to circumstances where they can demonstrate that the late provision of notice caused the insurer actual prejudice. Without a prejudice requirement, a mere foot-fault can determine the outcome of the entire match. Unfortunately, many states do not recognize the notice prejudice rule, and even in some jurisdictions that recognize the notice prejudice rule their courts hold that the rule does not apply to claims made policies.
I am such a keen advocate of the notice prejudice rule that I don’t think it should be left to the mere chance of what law a court determines applies to the interpretation of the insurance contract. The notice requirement should be built right into the policy. It may be advisable, as I have previously discussed in prior posts, to seek (where available) the addition of policy language 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.
The inclusion of this language will ameliorate the hardships that can arise when the late provision of notice results in coverage preclusion. The inclusion of this language would certainly eliminate the dispute about whether or not the notice prejudice rule applies in the context of claims-made policies.
Some other remedial policy measures have become fairly common in recent years. For example, many policies provide that the time within which the policyholder must provide notice of claim does not begin to run until certain specified officials at the policyholder company become aware of the claim. This provision protects against the problems that can arise when the person that knows about the claim is different than the person than knows about the insurance. So that addresses at least one of the frequently recurring problems.
One other remedy I have previously advocated has to do with continuity of coverage – for example, where, as here, the same insurer has provided the insurance across successive policy periods, and accepted premiums across successive policy periods, and a claim is made in the policy period of one policy and notice is provided during the policy period of the renewal policy. I think simple fairness ought to require an insurer who has accepted successive premiums to provide coverage for the very type of claim for which coverage is sought to provide coverage, at least in the absence of a showing that the late provision of notice prejudiced the insurer. However, I have to acknowledge that in recent months this theory has not fared particularly well in the courts. See for example, here and here.
There is a particular problem here I want to focus on, and that is the fact that even a policyholder that is diligent and attentive can still run into a late notice problem if they simply fail to recognize that a particular set of circumstances represents a claim. How do we protect our customers from these kinds of problems? I don’t know any surefire way. One thing I can think of is education – I make it my business wherever I go and whoever I am talking to to tell people repeatedly and emphatically that an EEOC charge is a claim. (Here, some of my colleagues are smiling and shaking their heads and saying, “Yep, he does that.”) I may not be able to save everyone from this mistake but if I tell enough people maybe I can help someone somewhere avoid the problem.
Another thing we can try to do is to emphasize the need for policyholders to seek the assistance of their insurance advisor and outside counsel. A part of the annual renewal cycle should include some type of educational message stressing the importance of staying in touch and checking reviewing developments with the insurance advisor. The annual renewal cycle should also include some effort to remind the policyholder that a wide variety of different circumstances could trigger the notice requirement.
I don’t have any ideas that can entirely solve this problem. However, I want to emphasize in closing that this isn’t just a problem for policyholders and their advocates, this is a problem for our entire industry, including the insurers. I meant what I said above: at some point the recurrence of the late notice issue is not a problem of user error, it is a problem with the product itself. As an industry, we need to try to find a way to fix it or at least to reduce the damage that the problem causes.