by Christopher Graham and Joseph Kelly

Surprise! Words in a contract may not mean what they say. Even when they’re unambiguous. Or even if agreed by sophisticated parties. That’s particularly true for insurance contracts. And lately it’s super-double particularly true for claims made insurance contracts.

You saw that in our recent post about California and Maryland cases involving claims made policies with reporting requirements. Although insurance buyers failed to report claims timely under contract wording, judges didn’t care. Insurers must pay unless they show prejudice from delay, the judges ruled. California judges decided that way because of judge-made “common law.” And it’s California! Maryland judges decided that way because a statute required the result, they said.

Now in the land of cheese, beer, and brats, Wisconsin judges made a decision smelling like Limburger for Wisconsin claims made insurers. The case is Anderson, et al v. Aul, et al, Case No. 2013AP500 (Feb. 19, 2014). And the insurer loses on an untimely reporting defense even though the insured wasn’t even close to meeting the policy’s reporting requirement. The problem for the insurer: a statute trumped the policy wording.

This was a lawyers’ professional liability insurer. And the law firm insurance buyer was as sophisticated as you can get. There was no lack of clarity in the policy wording. Insurer’s policy cover warned: “THIS IS A CLAIMS MADE AND REPORTED INSURANCE POLICY. COVERAGE IS LIMITED TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE FIRST MADE AGAINST YOU AND REPORTED IN WRITING TO US DURING THE POLICY PERIOD.” Insurer’s declarations page warned: “This policy is limited to liability for only those claims that are first made against the insured and reported to the Company during the policy period.” Insurer’s insuring clause conditioned coverage on “claims first made against you and first reported to us in writing during the policy period.” And it also warned that “[y]our failure to send a written report of a claim or claim incident to us within the policy period shall be conclusively prejudicial to us.”

Despite those warnings, the law firm waited until 11 months after the policy period to report a claim. But who cares, says the court! Under WIS. STAT. § 631.81, “an insurer whose insured provides notice within one year of the time required by the policy must show that it was prejudiced and that it was reasonably possible to meet the time limit.” This law firm’s notice was within 11 months. No prejudice? Insurer as a matter of law loses, at least based on the reporting defense.

For a claim reported more than a year after the reporting time limit, a claims made and reported insurer likewise couldn’t simply rely on tardiness to deny coverage. Under the Wisconsin statute, “when notice is given more than one year after the time required by the policy, there is a rebuttable presumption of prejudice and the burden of proof shifts to the claimant to prove that the insurer was not prejudiced by the untimely notice.”

The Wisconsin law applied to all liability insurance policies. There was no distinction made between claims made and occurrence policies. Who knows whether the lawmakers knew or considered the differences between the policies. But it doesn’t matter. For Wisconsin insurance buyers, buy a round of Leinie’s, Schlitz, Hamm’s, or Old Style for everyone at your local tavern to celebrate your win!

Insurers say the reporting requirement isn’t there merely to allow timely investigation and defense. The reporting and claims made requirements are the essence of the insurance. Whether prejudice resulted from untimely reporting shouldn’t matter. The reporting requirement allows insurers to close their books on risk once the reporting period ends. It also allows for more effective product pricing.

Insurance buyers argue late notice should make no difference if the insurer isn’t harmed in its ability to investigate or defend. Their advocates convinced politicos in some states to pass laws saying so, including Wisconsin. Sometimes they get judges to in effect do the same.

So watch out insurance underwriters. You may not have what you think. Make sure you consider the possibility of a statute or judge-made law and price your product accordingly.

And watch out insurance purchasers. You may have something better than what your contract’s words say, though it’s still best to simply do what your contract says you should do, timely report!

Tags: Wisconsin, professional liability insurance, lawyers professional liability insurance, lawyers malpractice insurance, D&O insurance, directors and officers liability insurance, claims made and reported, claims made, late notice, prejudice, notice prejudice