Avoiding the Minefields of Claims-Made Insurance Policies

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Avoiding the Minefields of Claims-Made Coverage

Risk and Insurance Management Society, Inc.Carolinas Chapter

17 November 2016

L. D. Simmons, IIMcGuireWoods LLP

[email protected]

mailto:[email protected]

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Introduction

• What is claims-made coverage?

• History of the claims-made form

• Key coverage issues arising from claims-made forms

• Best practices in purchasing claims-made policies


Claims-Made vs. Occurrence Coverage

• Occurrence-based coverage:– Common in commercial general liability policies– Insures bodily injury or property damage that takes place

during the policy period regardless when the claim is made

• Claims-made coverage– Common in D&O, professional liability and specialty policies– Provides coverage if the claim is made against the insured

during the policy period, regardless when the injury took place


Key Differences Between Occurrence and Claims-Made Policies

• The claim, not the injury, is the threshold event – The policy in effect at the time of the claim provides

coverage

• A wrongful act triggers coverage, not bodily injury or property damage

• Reporting is an element of coverage, not a policy condition

• If notice is late, the insurance company does not have to prove prejudice


History of Claims-Made Coverage

• Arose in the professional liability arena

• Why?: The time lag between the error and the claim– Professionals are rarely aware of errors when they occur

• Joe DeAllesandro at AIG found a better way − provide coverage based on the date of the claim, not the date of the injury

• The result was two branches of claims-made insurance:

• Expanded significantly in 1980s

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Coverages Provided on Claims-Made Forms

1. Directors and Officers

2. Medical Professional Liability

3. Legal Professional Liability

4. Employment Practices Liability

5. Brokers Errors and Omissions

6. Media Liability

7. Cyber Liability

8. Technology Errors and Omissions

9. Certain Types of Product Liability

10. Fiduciary Liability


Two Types of Claims-Made Policies

• Pure claims-made policies – require only that the claim first be made against the insured during the policy period

• Claims-made and reported policies – require that the claim first be made against the insured during the policy period and reported to the insurer during the policy period or an extended reporting period.


Claims-Made and Reported PolicySample Policy Language:

This is a claims-made and reported policy …. This policy has certain provisions and requirements unique to it and may be different from other policies an “insured” may have purchased …. “Claims” must be first made against the “insured” during the “policy period” and “claims” must be reported, in writing, to us during the “policy period”, the automatic extended reporting period or the extended reporting period, if applicable.

[Zurich American 2012 Policy Form]


Elements of Coverage Under Claims-Made and Reported Policies

1. A wrongful act that falls within the coverage grant

2. The wrongful act takes place after the “retroactive date”

3. A claim made against the insured during the policy period or the extended reporting period

4. The reporting of the claim to the insurer during the policy period or the extended reporting period

5. No exclusions apply


Key Issues in Claims-Made Coverage


Wrongful Acts

• First step -- find the right policy

• CGL or professional services?

• Marx v. Hartford Accident and Indemnity (Nebraska 1968)

“A ‘professional’ act or service is one arising out of a vocation,calling, occupation, or employment involving specializedknowledge, labor, or skill, and the labor or skill involved ispredominantly mental or intellectual, rather than physical ormanual. … In determining whether a particular act is of aprofessional nature or a ‘professional service’ we must look notto the title or character of the party performing the act, but tothe act itself.”


Did the Wrongful Act Take Place After the Retroactive Date?

• Most claims-made policies require that the wrongful conduct take place after the retroactive date

“[S]uch act, error or omission must commence on or after the “retroactive date” and before the end of the “policy period””

[Zurich 2011 E&O Policy]

• Best practices: – Drive the retro date as early as possible– And, never change the retroactive date


What is a Claim?

• Typical E&O policy definition:

“Written demand or notice against any Insured” or “a civil, administrative, or regulatory investigation against any insured”


What is a Claim?

• Typical D&O policy definition of “Claim”:

(a) a w ritten demand for monetary or non-monetary relief against an Insured Person or, with respect to Insuring Agreement C, against the Insured Organization; including a request to toll the statute of limitations;

(b) a civil or criminal judicial proceeding or arbitration against an Insured Person or, with respect to Insuring Agreement C, against the Insured Organization;

(c) a formal administrative or regulatory proceeding against an Insured Person; or

(d) a formal criminal, administrative, or regulatory investigation against an Insured Person, including the receipt of a Wells Notice to an Insured Person;


What if “Claim” is Not Defined

• Many policies do not define “claim”

• Courts apply common-sense definitions:

– “A demand on the insured for damages resulting from the insured's alleged negligent act or omission”

– “A demand for something as of right”

– “An effort by a third party to recover money from the insured”


What is a Claim?

• There is no clear answer:

– A request for information - NO• Hoyt v. St. Paul Fire and Marine (9th Cir. 1979)

– A demand for regulatory compliance - NO • FDIC v.Mijalis (5th Cir. 1994)

– Letter to former counsel demanding counsel rectify problems created for plaintiffs - YES • McCabe v. St. Paul Fire & Marine Ins. Co. (N.Y. 2010)


Was the Claim Reported Timely?

• Under claims made and reported policies, the claim must be reported during the policy period or the extended reporting period

• Many claims-made polices have standard 60-day extended reporting periods

• Examples of other extended notice/reporting periods– Run-off period– Discovery period


What is Effective Notice?

• No “magic” to notice• Notice must go to the insurer – reporting to the broker is not

sufficient• Provide notice under all potentially applicable policies• Provide the relevant facts: claimant, nature of claim, date of

claim, relief sought (money or other)• Do not rely solely on the broker


Run-Off Period

• D&O policies terminate upon a change in control

• A run-off policy can be purchased to extend coverage for claims relating to pre merger conduct

• Run off coverage protects executives from claims arising after the change in control– BUT, the claim must arise from conduct before the

change in control


Discovery Period

• Additional period of time during which a claim can made and trigger coverage under the policy and during which the insured can report such claims

• Can be purchased when the policy is cancelled (e.g., due to merger or acquisition) or when insurer refuses to renew

• The claim(s) must arise out of conduct that occurred before the end of the policy period or the date of cancellation

• Duration of period is usually six years


Reporting is Essential to Coverage

• With claims-made and reported policies, reporting is a condition of coverage

– Majority rule: If notice is untimely, no coverage exists regardless of prejudice to the insurer

– Minority rule: The insurer must show prejudice to deny coverage


No Seamless Claims-Made Coverage

• Many courts have held that successive claims-made and reported policies do not create seamless coverage– The insured must provide timely notice under the correct

policy

• No coverage because claim was not first made and reported during a single policy period. Pizzini v. American Int’l Specialty Lines (PA 2002)

• Renewal of claims-made policy does not create a single policy for the purposes of reporting. Quinones. V. Jimenez & Ruiz (Puerto Rico 2003)


Notice of Claim

2004 - 2005 Policy Period 60 Day ERP

Insured served with a lawsuit resulting from EEOC complaint. If insured reports to carrier, no coverage applies because it was not reported during the policy period or ERP.

2005 – 2006 Renewal Term

If the claim were made and reported during this period, coverage would apply.

Insured receives discrimination complaint from EEOC(i.e. Claim by Policy definition). Insured does not report to Carrier.


Notice of Claim

2004 - 2005 Policy Period 60 Day ERP 15 Days

Insured later served with lawsuit for harassment and reports to Insurance Company 15 days after ERP. Insured, therefore, is not covered since the claim is not reported during the policy period or ERP.

Employee sends e-mail to supervisor stating he/she is being harassed and asks the supervisor to intervene by moving him/her to another department (i.e. Claims: Non-Monetary Demand).

Insured must report to carrier during this period to ensure coverage.


Insuring the Event That is not yet a Claim -Notice of Circumstances

• Notice of circumstances clause:

“The insured shall provide notice as soon as practicable of any circumstances of which they shall become aware during [the policy period] … which may give rise to a loss or claim against them.

"Such notice having been given, any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of [the policy period] … shall be deemed for the purpose of this insurance to have been made during the subsistence hereof."


Interrelated Acts Exclusion

This Policy excludes all “Loss arising from any Claim . . . based upon, arising out of, directly or indirectly resulting from

(a) any fact, circumstance, transaction, event or Wrongful Actthat, before [the policy’s inception date], was the subject of any notice ofClaim or Loss, or notice of potential Claim or potential Loss, given under any other policy of insurance;

(b) any fact, circumstance, transaction, event or Wrongful Act ofwhich, as of [the policy’s inception date], any Insured had knowledge andthat was reasonably likely to give rise to a Claim that would fall within thescope of the insurance afforded by this Policy; . . . , or


Interrelated Acts Exclusion

• Bars coverage for:

– Claims where the insured provided notice to an earlier insurer

– Claims where the insured had notice of a fact or circumstance that might give rise to a claim

• And, bars coverage for “interrelated wrongful acts,” which are defined as – "any Wrongful Act that is logically or causally connected by

reason of any common fact, circumstance, situation, transaction or event."


Coverage for Pre-Tender Defense Costs

• Both occurrence and claims-made policies contain the same condition limiting coverage for “voluntary payments”

• Sample “voluntary payments” condition:

“No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent”

• Payments made prior to notice are not covered – no prejudice required


Buying the Claims-Made Policy



• Buy only from a highly rated company

• Consider policy premium, or retention, limits and claim capabilities of the insurer

• Compare offerings from multiple carriers

• If you can, buy a claims-made policy, not a claims made and reported policy, because the latter requires notice withingthe policy period

• Consider the policy definition of claim – make it as broad as possible



• Complete the application carefully and thoroughly – do not rely solely on the broker

• Complete a thorough survey, with documentation, of all employees who might have knowledge of a covered claim

• Provide notice of all facts and circumstances that might give rise to a claim

• If buying professional liability coverage, make sure that the definition of professional services is sufficiently broad



• Drive the retroactive date as early as possible

• Make the extended reporting period as long as possible

• Limit the individuals who are capable of receiving notice –e.g., management personnel

• Review all policy exclusions

• Many policy terms are negotiable


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Avoiding the Minefields of Claims-Made Coverage

Risk and Insurance Management SocietyCarolinas Chapter

17 November 2016

L. D. SimmonsMcGuireWoods LLP

[email protected]

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Avoiding the Minefields of Claims-Made Insurance Policies