California Courts Continue Carefully to Review and Apply Claims-Made-And-Reported Provisions As Drafted

Within the past year, two federal district courts in California issued decisions that analyzed how coverage triggers operate under a claims-made-and-reported policy. Ace Capital Ltd. v. ePlanning, Inc., 2013 U.S. Dist. LEXIS 32613, *23-26 (E.D. Cal. Mar. 7, 2013) [enhanced version available to lexis.com subscribers] and PCCP LLC v. Endurance American Specialty Insurance Co., 2013 U.S. Dist. LEXIS 114400, *22-25 (N.D. Cal. Aug. 13, 2013) [enhanced version available to lexis.com subscribers]. These decisions confirm the basic concept that a claims-made-and-reported policy imposes two requirements before coverage can be triggered. First, the claim must be first made against the insured during the policy period (or the extended reporting period, if applicable). Second, coverage will not be provided if the claim is reported to the carrier after the stated reporting period, without regard to whether or not the carrier is prejudiced by the late notice. See KPFF, Inc. v. California Union Insurance Co., 56 Cal. App. 4th 963, 972 (1997) [enhanced version available to lexis.com subscribers]. However, the rulings in Ace Capital and PCCP , as well as the 2009 decision by the Central District of California in Illinois Union Insurance Co. v. Brookstreet Securities Corp., 2009 U.S. Dist. LEXIS 130101, at *21-22 (C.D. Cal. Nov. 20, 2009) [enhanced version available to lexis.com subscribers], aff’d, 444 Fed. Appx. 194 (9th Cir. 2011) [enhanced version available to lexis.com subscribers], demonstrate that even seemingly small differences in claims-made-and-reported policy language can result in different outcomes.

The policy at issue in Ace Capital contained fairly common policy language. In Ace Capital, the insureds were issued an E&O policy that, by its terms, provided coverage for claims first made and first reported during the policy period of September 1, 2007 to September 1, 2008. A number of claims were made and reported during the policy period, the total liability of which far exceeded the policy’s limits. While the insurer initially undertook the defense of the insureds and settled some of the underlying claims, it eventually interpleaded the remainder of the policy limits.

Prior to the filing of the interpleader action, certain claimants filed four separate underlying actions against the insureds. The earliest of those actions was filed on December 23, 2009 – more than a year after the end of the relevant policy period. The parties settled the underlying lawsuits and, as a part of that settlement, one of the insureds assigned his rights under the E&O policy to the claimants. Pursuant to that assignment, the claimants filed a counterclaim against the insurer in the interpleader action that asserted causes of actions for declaratory relief, breach of contract, and breach of the implied covenant of good faith and fair dealing. The counterclaim failed to plead that the carrier had been notified of the lawsuits within the policy period. Based on that omission, and based on the fact that the claims were first made after the policy period expired, the carrier filed a motion to dismiss the counterclaim. The court granted the insurer’s motion to dismiss and held that coverage was unavailable under the E&O policy because the four underlying claims were first made more than a year after the expiration of the policy and, thus, could not have been timely reported. The court could have also relied on the fact that the suits were all filed after the conclusion of the policy period as a separate basis to grant the insurer’s motion.

In PCCP, the insureds were issued a professional and executive liability policy that provided coverage for claims first made and first reported during the policy period of March 18, 2009 to March 18, 2010. The policy’s notice provision required the insureds to provide the carrier with written notice of “any Claim made against any Insured as soon as practicable” after the insured “becomes aware” of the claim, “but in no event later than: (1) the expiration date of this Policy [or] (2) the expiration date of the Automatic Extended Reporting Period[.]” 2013 U.S. Dist. LEXIS 114400, at *15. By its terms, the Automatic Extended Reporting Period (“AERP”) went into effect immediately following the insureds’ non-renewal of the policy on March 18, 2010 and provided coverage only for “[c]laims first made against the Insured during the sixty (60) days immediately following the effective date of such nonrenewal,” and not for claims first made during the policy period.

The insureds in PCCP were named as third-party counter-defendants in an underlying action on November 1, 2009 (i.e., during the policy period); however, the insureds failed to notify the insurer of the underlying action until April 21, 2010, which was more than a month into the AERP. The insurer denied coverage for the claim on the basis that it was not timely reported. The insureds filed a lawsuit against the carrier in California state court and asserted that the insurer wrongfully denied coverage because the claim was reported before the expiration of the AERP, and that even if the claim was untimely reported, the insurer did not suffer actual prejudice from the late notice. The insurer removed the lawsuit to the Northern District of California, and the parties filed cross-motions for summary judgment.

The Northern District Court granted summary judgment in favor of the carrier and held that the carrier properly denied coverage because the insureds failed to timely report the claim under the terms of the policy. In so holding, the court held that the terms of the AERP only provided coverage for claims first made during its term and that a claim first made during the policy period, but reported during the AERP, is not covered by the policy. The court noted that the result would be different under a policy that provided an extended reporting period for claims first made during the policy period, which is what the court characterized as the “legal community’s” general understanding of how AERP’s operated, but stated that its ruling was proper based on the policy language at issue. The PCCP court also held that the insurer was not required to demonstrate actual prejudice stemming from the delay in notice because the policy was undisputedly a claims-made-and-reported policy.

In Illinois Union, the Central District of California made it clear that courts will also enforce reporting provisions in claims-made-and-reported policies that require reporting within a period shorter than the policy period. Specifically, the Illinois Union court held that no coverage was available for claims first made and reported during the applicable policy period because the policy at issue required the claims to be reported within 30 days of when they were first made, and the insureds failed to provide the carrier with notice within that time period. The court in Illinois Union also rejected the argument that a carrier must show prejudice before denying coverage based on late notice.

In conclusion, while many claims-made-and-reported policies contain trigger language requiring that a claim be first made and first reported during the policy period (or an extended reporting period, if purchased), there are numerous variations of these requirements that can affect the outcome of a case. As evidenced in Ace Capital, PCCP, and Illinois Union, California courts generally will strictly enforce the trigger language found in the specific policy at issue, so careful consideration should be given to the precise policy language under consideration.

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