by Christopher Graham and Joseph Kelly

You underwrite claims-made D&O, and professional, fiduciary, and employment practices liability insurance. So claims trigger coverage. As a policy condition, customers must report claims as soon as practicable, but in no event later than 30 days after the policy period.

Customers include medical device companies. They need professional and commercial general liability insurance. You combine your professional liability and historically occurrence-trigger CGL products into a claims-made product. You love that product: no worries about long-tail claims from occurrences years earlier; much easier to know when risk ends; easier to price products; and, best of all, actuaries love you.

So you think your risk ends when the 30-day claim-reporting window ends unless a claim is reported. You also may have risk of a claim developing after the policy period from a circumstance reported during the policy period; or of a claim made during a 12-month extended reporting period if purchased; or of a post-policy period claim involving the same or related wrongful acts as a policy period claim. That’s it. You think.

But if your claim reporting requirement isn’t in the policy’s insuring agreement and you’re in California, think again, says the court in Newlife Sciences LLC, et al v. Landmark American Ins. Co., Case No. 13-05145 (N.D. Cal. Feb. 18, 2014).

There, a medical device company buys a combined professional liability-CGL product effective July 17, 2008-2009. It’s a duty-to-defend policy. Company is sued less than 3 months after policy inception. But it doesn’t report the claim. It buys a 1-year renewal policy. And the predecessor policy’s 30-day claims-reporting window ends; still no claim reported. Insurer closes its books.

About 2 months later, about a year after the claim, company finally reports the claim to insurer. Insurer says “Sorry, yes, the claim was made during the July 17, 2008-2009 policy period. But you didn’t report it timely. So you’re out of luck.” Company says, “But we bought another policy from you. What difference does it make? You really haven’t suffered any prejudice?”

Insurer says “Timely notice was a condition to coverage. Your claims-made policy has a reporting requirement. You ignored it. We closed our books. We price our products based on the claim made and reporting requirements. Prejudice doesn’t matter. You can’t ignore contract terms.”

Company says, “But this is California.” You must prove prejudice to avoid coverage for late notice. It sues insurer.

Insurer moves to dismiss; company’s complaint shows it didn’t comply with the claims-made policy’s reporting requirement. Claims-made policies differ from occurrence policies where prejudice is required for a late-notice defense.

The court denies the motion: “When the insurer’s affirmative defense is that the insured failed to comply with one or more policy conditions, the insurer must also show prejudice.” According to the court:

The concept of “claims made” policies has been further extended by a type of policy in which the insuring agreement specifically limits the insurer’s obligations to “claims made and reported” during the policy period. In such policies, “[t]imely reporting of the claim is thus the event triggering coverage.” . . . These policies “are essentially reporting policies.” [Citation omitted]. The reporting requirement in a “claims made and reported” policy is, thus, not a condition of coverage but part of the coverage definition itself. Whereas an insurer bears the burden to show it was prejudiced by the insured’s failure to comply with a reporting condition, it is the insured that bears the burden to show the claim was timely reported in a “claims made and reported” policy.

The court thus found the reporting requirement’s location controls whether insurer must prove prejudice from late notice. A reporting condition requires proof of prejudice. But an insuring agreement reporting requirement does not, at least if about reporting within 30 days of policy termination. But the court never really explains why the result differs because of wording location. It doesn’t appear insurer argued there was no substantive difference between locating the wording in the insuring agreement or a notice condition.

Insurer instead argued the reporting condition was incorporated into the insuring agreement. But the court didn’t buy the argument, explaining:

[T]he policies at issue are titled “claims made” policies . . . , in which the insuring agreement limits coverage to claims made against the insured during the policy period or any extended reporting periods provided for by the policy. . . . The policies also include as a condition of coverage that the insured report all claims to the insurer no later than 30 days from the close of the policy period. According to [insurer], this condition transforms each policy into a “claims made and reported” policy because all conditions of coverage are incorporated into the insuring agreement itself by a separate clause that states, “[Insurer] will pay those sums that the Insured becomes legally obligated to pay as damages because of `personal and advertising injury’ to which this insurance applies.” . . . [Insurer], however, provides no authority for the proposition that such a statement should transform each condition of coverage—and presumably, each exclusionary provision—into a term of the basic insuring agreement. Such a reading would defeat the interpretive rules discussed above, in which the onus is on the insured to prove a claim falls within the basic scope of insurance and on the insurer to prove any exclusions or conditions apply. “Although it is a well-established principle that an insurer has the right to limit policy coverage, it is also the rule that any limitation of coverage must conform to the law and public policy.” [citation omitted]

Whether prejudice is required from late notice is controlled by state law. For liability policies, it frequently makes a difference whether the policy trigger is an occurrence or claim. In many states, insurers under occurrence policies must prove prejudice to avoid coverage for late notice. The reporting requirement allows insurers to investigate occurrences and defend and settle suits. If delay doesn’t adversely affect those efforts then insurers shouldn’t avoid coverage, so say many courts.

In many states, insurers under claims-made policies in contrast need not prove prejudice to avoid coverage from late notice, at least if notice is required within the policy period or a limited window thereafter. Unlike the notice requirement in occurrence policies, the reporting requirement in claims-made policies also allows insurers to close their books on risk once the reporting period ends. The two policy types thus fundamentally differ. But for this court, all that mattered was the reporting requirement’s location. But was that a distinction that should make a difference?

A court in at least one state found location made no difference. See Navigators Specialty Insurance Co. v Medical Benefits Administrators of Maryland, 2014 U.S. Dist. LEXIS 22631 (D. Md. Feb 21, 2014). But it also found that regardless of location a claims-made insurer must prove prejudice. There the reporting requirement was in the insuring agreement, not the notice condition. And the result was driven by a statute requiring proof of prejudice for late notice, mainly applied to occurrence policies, but applied in this case to a claims-made policy.

Watch for further legislation and court decisions addressing this issue. You’ll be sure to see them!

Tags: California, professional liability, commercial general liability, CGL, notice, prejudice, notice-prejudice, claims made, claims made and reported, medical device, insuring agreement, condition