by Chris Graham and Joseph Kelly

PCCP LLC, et al v. Endurance American Specialty Insurance Company (N.D. Cal. August 13, 2013)

Endurance provided real estate investor and lender plaintiffs with a claims made and reported professional liability policy with a policy period from March 18, 2009 to March 18, 2010. The policy included a 60-day “Automatic Extended Reporting Period” (“AERP”) upon non-renewal of the policy.

On November 19, 2009 — during the policy period — plaintiffs were named as third-party counterclaim defendants in a Hawaii state court lawsuit about a failed real estate development. But, plaintiffs didn’t notify Endurance until April 21, 2010 during the AERP. Endurance denied coverage and plaintiffs filed suit against Endurance. Endurance then successfully moved for summary judgment.

The Insuring Agreement of the policy provided, in pertinent part:

“[Endurance] shall pay on behalf of [plaintiffs] all Loss resulting from any Claim … first made against [plaintiffs] and reported to [Endurance] in writing during the policy period or any applicable Extended Reported Period for any Wrongful Act.”

Regarding claims reporting, the policy provided:

“As a condition precedent to coverage under this Policy, [plaintiffs] shall provide [Endurance] written notice of any Claim … made against any Insured as soon as practicable after the President, Chief Executive Officer, Chief Financial Officer, General Counsel, Risk Manager or Director of Human Resources of the Named Insured becomes aware of such Claim …, but in no event later than: (1) the expiration date of this Policy; (2) the expiration date of the Automatic Extended Reporting Period;…”

And regarding the AERP, the policy provided:

“If the Company or the Named Insured shall cancel or refuse to renew this Policy, then the Company shall provide the Named Insured an automatic and noncancellable extension of this Policy, subject otherwise to its terms, Limits of Liability, exclusions and conditions, to apply to Claims first made against the Insured during the sixty (60) days immediately following the effective date of such nonrenewal or cancellation, for any Wrongful Act committed before the effective date of such nonrenewal or cancellation and After the Retroactive Date (if any) and otherwise covered by this insurance. This Automatic Extended Reporting Period shall terminate after sixty (60) days from the effective date of such nonrenewal or cancellation.”

Applying California law, the court found the policy unambiguous stating “[t]he specific terms of the AERP only ‘apply to claims first made against the Insured during the sixty (60) days immediately following the effective date of [the Policy’s] nonrenewal or cancellation, for any Wrongful Act committed before the effective date of such nonrenewal or cancellation … and otherwise covered by this insurance.” The court noted the effect of the AERP language is “to provide coverage when a wrongful act occurs during the policy period but the claim based on that wrongful act only materializes in the sixty days after the policy period, provided that the claim is reported within those sixty days.

Here, the AERP didn’t apply to the plaintiffs’ claim because the claim wasn’t first made within the AERP. Rather, plaintiffs’ claim was “first made” during the policy period but not reported during the policy period. Plaintiffs’ claim thus was untimely.

The court also reaffirmed the notice-prejudice rule doesn’t apply under California law to claims made and reported policies because the purposes of such policies “to allow insurers to ‘close their books’ on a policy by a date certain, and thus be able to price policies more accurately.”