Some Observations on Notice Requirements Under Claims-Made Forms and Other Policies with Strict Claim Reporting Requirements

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1 Some Observations on Notice Requirements Under Claims-Made Forms and Other Policies with Strict Claim Reporting Requirements By Laura A. Foggan Partner, Wiley Rein LLP Perhaps the most basic observation about claims-made policy forms is that coverage is triggered by the making of a claim. Through the use of claims-made coverage forms, insurers confine the risks that are covered to claims made within a specified period of time, enabling them to more accurately predict their liability and contain the costs of coverage. With claims-made policies, the insurer is better able to predict its potential coverage obligations within a set time period. It can then close its books on the exposure under the policy, a result that is impossible under occurrencebased policy forms where long tail claims may implicate policies that were issued decades earlier. Claims-made policies shorten the exposure period for the insurer on a policy, i.e., the time from when the insurer prices a risk and issues a policy to when the insurer may be required to pay on the risks it assumed under the policy. Notice provisions in claims-made policies help protect the insurer s ability to determine any exposure under the policy within a set time period. This is true of at least two types of notice provisions commonly found in claims-made policy forms. First, like almost all liability policies, claims-made policies generally contain a prompt notice provision. The policyholder must provide notice as soon as practicable or immediately after a claim is made. Prompt notice of the claim allows the insurer to know its potential obligations under a claims made policy within a short time after the policy period. In addition, many claims-made policy forms also contain a specific

2 reporting requirement, which requires that notice of a claim be reported to the insurer within a specified period. The reporting period may be the same as the policy period or slightly longer, i.e., an extended reporting period. Often, reporting provisions require the claim to be reported both consistently with a prompt notice provision and no later than 30 or 60 days after the end of the policy period. Obviously, the reporting period further serves to ensure that the insurer knows its obligations within a set time after a claimsmade policy expires. Indeed, reporting periods have been used in other policy forms and endorsements to cabin the exposure from a specified risk for which limited coverage is being provided, e.g., in seepage and pollution buy-back endorsements. Below, the effect of the prompt notice and reporting period provisions in each of these settings is considered in more detail. 1 In any liability policy form, prompt notice is important to insurers because it allows the insurer to protect itself and its interests under the insuring agreement. It enables insurers to make a timely investigation of relevant events and exercise early control over a claim, possibly leading to settlement before litigation. Prompt notice also enables insurers to take steps to eliminate the risk of similar claims in the future, to establish more accurate renewal premiums and maintain adequate reserves. In a claimsmade policy, timely notice is especially critical to insurers because of its fundamental relationship to the scope of coverage under the policy and the insurer s ability to close its books on a policy in a reasonable time period. This relationship between notice and 1 Another, independent set of issues is posted by a third type of notice provision often found in claims-made policy forms: a notice provision that allows an insured to provide notice of facts and circumstances that may give rise to a claim. By providing notice of facts and circumstances that may give rise to a claim, the claim may be deemed first made during that policy period regardless of when it actually is made. The steps necessary to invoke notice of circumstance provisions under claims-made forms are another area of keen dispute, but are beyond the scope of this article. 2

3 the basic nature of the claims-made policy provides a strong additional reason for strict enforcement of notice requirements in claims made forms. In any form with a strict reporting period requirement, there is a also a key relationship between the reporting period and the scope of coverage afforded. In a policy with a reporting provision, it is evident that finding coverage for a claim not reported within the specified reporting period would extend coverage beyond the scope of the insuring agreement. Many courts recognize this point and refuse to impose a prejudice requirement under a claims-made-and-reported policy with respect to notice not provided during the specified reporting period. See, e.g., Esmailzadeh v. Johnson & Speakman, 869 F.2d 422, 425 (8th Cir. 1989); City of Harrisburg v. Int l Surplus Lines Ins. Co., 596 F. Supp. 954, 961 (M.D. Pa. 1984), aff d without opp n, 770 F.2d 1067 (3d Cir. 1985) (unpublished table decision). Perhaps more controversial is the question whether the same strict enforcement of notice provisions applies with respect to all prompt notice provisions in claims-made policies, even when the claim is reported within the specified reporting period or when the policy does not contain a reporting provision at all. In this setting, policyholders argue that notice is no longer linked to the scope of coverage and serves only to protect the insurer s interests in the defense of the claim. However, any claims-made policy form is designed to allow the insurer to know its potential exposure under the policy within a short time after the end of the policy term. Not strictly enforcing any notice requirement in the policy undermines this interest. Given this background, it is interesting to see how courts have treated notice provisions in claims-made settings and under policies containing specific reporting provisions. The split in court treatment of prompt notice provisions in claims-made 3

4 policies is shown by two state high court decisions issued this year: Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Co., 288 S.W.3d 374 (Tex. 2009) and Ace American Insurance Co. v. Underwriters at Lloyds & Cos., 971 A.2d 1121 (Pa. 2009). Issued just a month apart, these two decisions reached directly opposite conclusions about policyholder arguments that the insurer should not be permitted to deny coverage for an otherwise covered claim due to late notice unless there is prejudice to the insurer from the delay in notice, at least where notice was given within the reporting period of the policy. In Prodigy, the Texas Supreme Court held that the notice-prejudice rule applied in the context of a claims-made-and-reported policy where notice was required as soon as practicable and, although late, was provided during the relevant reporting period. The court distinguished the notice during the reporting period requirement from the notice as soon as practicable requirement. As to the latter, the insurer was deprived of its bargain only if it was prejudiced by the delay, the Texas high court held. In contrast, in Ace American, the Pennsylvania Supreme Court affirmed a ruling that, in a claims-made policy, notice is a condition precedent to coverage and the notice-prejudice rule does not apply. The policy required notice as soon as practicable... but in no event later than ninety (90) days after the [policy] expiration... For a claim likely to exceed $4M, it required the insured to forward as soon as practicable every demand, notice, summons or other process received. However, the insured could provide cumulative notice of claims unlikely to exceed $4M by means of a quarterly bordereau listing of all such Claims. The policyholder provided notice of the claim via bordereau prior to the policy expiration. The insurers argued, however, that the policyholder should have known that 4

5 the claim would likely result in a loss exceeding $4,000,000 and had breached the heightened and specific notice requirement by failing to provide more detailed notice until after the policy had expired. The policyholder claimed that it complied with the policy s general reporting requirement. Alternatively, the policyholder argued that Pennsylvania s notice-prejudice precedent would apply and require the insurer to establish that it was prejudiced by the late notice. The court held the policyholder had -- and did not meet -- the burden to show it complied with the notice requirements, and that prejudice was not required for the insurer to deny coverage under the claims-made-andreported policy. The decisions in Prodigy and Ace American demonstrate the highly controversial nature of notice issues under claims-made policies and courts conflicting views on this subject. Rather than resolve the controversies, these recent high court rulings suggest that notice questions are likely to be a source of continued friction and a basis for continued litigation between policyholders and insurers under claims made policy forms. Similar questions, moreover, are posed under other policy forms with reporting requirements, not just in professional liability coverage settings. For instance, a very similar controversy has arisen under so-called time element pollution exclusion policy forms. In Venoco, Inc. v. Gulf Underwriters Insurance Co., 96 Cal. Rptr. 3d 409 (Ct. App. 2009), for example, the court strictly enforced a 60-day reporting period in a seepage and pollution buy-back provision. The court noted that pollution buy-back provisions with reporting requirements such as the one at issue before it were not uncommon in the oil and gas industry, and that other courts had enforced their straightforward terms. As the court stated, [o]ther courts have held that pollution buy- 5

6 back provisions, like the one here, are clear and insurers may enforce their express reporting time limits. (Matador Petroleum v. St. Paul Surplus Lines Ins., supra, 174 F.3d at pp ; Certain Underwriters at Lloyd's v. C.A. Turner Const., supra, 112 F.3d at p. 189; Clarendon America Ins. Co. v. Bay, Inc. (S.D. Tex. 1998) 10 F.Supp.2d 736, [buy-back provision not operable where claim was not made within the 30-day reporting period].) Moreover, the court explicitly rejected an argument by Venoco that the 60-day reporting requirement should not be enforced because Gulf did not prove it would suffer substantial prejudice if notice were given later than 60 days. It explained, [w]here the policy provides that special coverage for a particular type of claim is conditioned on express compliance with a reporting requirement, the time limit is enforceable without proof of prejudice. The court recognized that such reporting time limits often are found in provisions for expanded liability coverage that the insurer usually does not cover. Thus, the policy extends special coverage conditioned on compliance with a reporting requirement and other conditions. Making explicit the analogy to reporting periods commonly found in professional liability policies, the court held that [i]mposing the prejudice requirement that Venoco seeks would expand the reporting time limit and impermissibly alter its agreement with Gulf. A similar dispute arose in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins., 174 F.3d 653 (5th Cir. 1999), where the insurance policy contained both a pollution exclusion and a limited endorsement to cover accidents provided that the oil company insured under the contract reported them within 30 days. The Matador court refused to impose a proof of prejudice requirement on the reporting period provision, holding that 6

7 [a]n extension of the notice period under the endorsement would expand this coverage and would expose St. Paul to a risk broader than the risk expressly insured against in the policy. In a variety of circumstances, therefore, courts have recognized the importance that notice provisions play in defining the scope of coverage where coverage is based on a claims-made form or conditioned on specific reporting period requirements. At the same time, as these cases demonstrate, policyholders seeking to escape strict enforcement of notice requirements raise many challenges to the plain terms of the policies, especially arguments seeking to inject prejudice requirements into the insurance agreement terms. With case law still developing on these issues, we are sure to see more litigation over notice issues in policies whose coverage includes strict reporting terms or is based on the timing of when a claim is made. 7