Notice of Claims in Claims-Made Insurance Policies Identifying - - PowerPoint PPT Presentation

Notice of Claims in Claims-Made Insurance Policies

Identifying Claims; Evaluating Whether and When to Report

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WEDNES DAY, FEBRUARY 22, 2012

Presenting a live 90-minute webinar with interactive Q&A

Eric G. Barber, Atty, Perkins Coie, Madison, Wis. Mark D. Villanueva, Atty., McCarter & English, Philadelphia Nancy R. Kornegay, Partner, Brown & Kornegay, Houston

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Defining “Claim” in Claims-Made Policies

Eric G. Barber Perkins Coie LLP (608) 663-7498 EBarber@perkinscoie.com

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• Usually quite broad;
• Often includes:
• Civil or criminal proceedings;
• Written demands;
• Administrative or regulatory proceedings;
• May include investigations of insureds
• As distinguished from a “Circumstance”

Definition of "Claim"

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Sample "Claim" Language

(1) a written demand for monetary, non-monetary or injunctive relief, including, but not limited to, any demand for mediation, arbitration or any other alternative dispute resolution process; (2) a civil, criminal, administrative, regulatory or arbitration proceeding for monetary, non- monetary or injunctive relief which is commenced by: (i) service of a complaint or similar pleading; (ii) return of an indictment, information or similar document (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges; (3) an Insured Person Investigation; (4) a Derivative Demand; (5) an official request for Extradition of any Insured Person, or the execution of a warrant for the arrest of an Insured Person where such execution is an element of Extradition. "Claim" shall include any Securities Claim and any Employment Practices Claim. Source: Chartis Executive Edge Broad Form Management Liability Insurance Policy (Form 104122 (4/10)), Section 13. Definitions, "Claim."

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Demand for Damages Cases

• Fed. Ins. Co. v. Ill. Funeral Director's Ass'n, 2010 U.S.
• Dist. LEXIS 129747 (N.D. Ill. Dec. 8, 2010) (letter from

agency identifying excess fees was a written demand for non-monetary relief);

• City of Santa Rosa v. Twin City Fire Ins. Co., 140 N.M.

434 (2006) (employment discrimination charge not a claim without damages demand);

• Westrec Marina Management, Inc. v. Arrowood Indem.

Co., 163 Cal. App. 4th 1387 (2008) (former employee's letter alleging wrongful termination was written demand).

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Coverage for Securities Claims

• Directors’ and officers’ insurance policies
• ften cover “Securities Claims” – claims

arising out of wrongful acts related to purchase or sale, or offer to purchase/sell securities issued by the insured;

• SEC investigations and enforcement

actions excluded in many cases, but they may be covered.

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Securities Claims Cases

• Nat'l Stock Exch. V. Fed. Ins. Co., 2007 U.S.
• Dist. LEXIS 23876 (N.D. Ill. Mar. 30, 2007) (SEC

investigation not a claim before formal order issued);

• Minuteman Int'l, Inc. v. Great Am. Ins. Co., 2004

U.S. Dist. LEXIS 4660 (N.D. Ill. Mar. 18, 2004) (SEC investigation was a claim where policy required demand for non-monetary relief);

• Highwoods Props. v. Exec. Risk. Indem., Inc.,

407 F.3d 917 (8th Cir. 2005) (breach of fiduciary duty involving stock was a claim).

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Are Subpoenas Claims?

• No definite answer – recent cases go both

ways and often turn on the policy’s specific language;

• Courts look at link between subpoenas

and related government investigations;

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Recent Cases Involving Subpoenas as Claims

• Ace Am. Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d

789 (D. Md. 2008) (subpoena and investigative demands were claims);

• Jemmco Partners v. Exec. Risk. Indem., Inc., No. L-486-

07 (N.J. Super. Ct., filed Mar. 22, 2007) (subpoena seeking documents was a claim).

• But see, Diamond Glass Cos. v. Twin City Fire Ins. Co.,

2008 WL 4613170 (S.D.N.Y. Aug. 18, 2008) (grand jury subpoena for documents/testimony was not a claim);

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Related/Interrelated Claims

• Losses stemming from same/related acts

generally considered a single claim;

• Policy language consolidates multiple

claims that have a "common nexus," or are "causally or logically connected";

• Very contentious issue without a clear

resolution across courts.

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Related/Interrelated Claims Cases

• Quanta Lines Ins. Co. v. Investors Capital Corp., 2009

U.S. Dist. LEXIS 117689 (S.D.N.Y. Dec. 17, 2009) (claims must have sufficient factual nexus to be interrelated);

• Axis Surplus Ins. Co. v. Johnson, 2008 U.S. Dist. LEXIS

77614 (N.D. Okla. Oct. 3, 2008) (factual analysis, not just legal theory, is essential to determine relatedness);

• G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S. Dist.

LEXIS 19069 (D.N.J. Mar. 16, 2007) (construing "interrelated wrongful acts" as unambiguous).

Mark D. Villanueva, Esq. McCarter & English 215.979.3854 mvillanueva@mccarter.com

Late Notice of Claims in Claims-Made Insurance Policies

What are Claims-Made Policies?



Professional liability policies such as Directors and Officers, Errors and Omissions, and Employment Practices Liability policies are typically written on a claims-made basis



Provide coverage for claims asserted against the insured during the policy period

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Benefits to the Insurer of Claims- Made Policies

• Limited tail exposure
• Predictability of potential obligations at close of

policy period

• Smaller gap of time between when insurer prices

policy and the time when the insurer may incur an

• bligation to pay

Notice Provision in Pure Claims Made Policies

• Typically requires notice “as soon as

practicable”

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Notice Provision in Claims-Made and Reported Policies

• Insurers place the reportingrequirement in the

Insuring Agreement, Conditions, or both

• Failure to trigger the Insuring Agreement bars

all coverage, while breach of a reporting Condition may not bar all coverage for late notice

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Notice Provision in Claims-Made and Reported Policies (cont.)

• Insuring Agreement: “…affords coverage for

claims first made against you and reported to us in writing during the period this Policy is in effect or within ninety (90) days following its termination.”

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Notice Provision in Claims-Made and Reported Policies (cont.)

• Conditions: “It is a condition precedent to this

insurance that you … [provide notice] of any claim as soon as practicable during the Policy Period . . . but in no event later than ninety (90) days after the expiration of the Policy Period.”

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Notice Provision in Claims-Made and Reported Policies (cont.)

• Some policies may also include the following

language in the definition of “Claim”:

• “A claim shall be considered ‘made’: (1) when it is

first reported to the Company”

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The Notice Prejudice Rule

• Many jurisdictions have considered the “notice prejudice

rule” in the context of occurrence based policies.

• Notice provision in occurrence based CGL policy may

provide:

• “In the event of an occurrence, written notice containing

particulars sufficient to identify the insured and all reasonably

• btainable information with respect to the time, place and

circumstances thereof, and the names and addresses of the injured and of available witnesses, shall be given by or for the insured to the company or any of its authorized agents as soon as practicable.”

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The Notice Prejudice Rule (cont.)

• “As soon as practicable” has been construed to mean

“within a reasonable time” and is a fact specific inquiry.

• See, e.g., Bass v. Allstate Ins. Co., 77 N.J. Super. 491, 495

(App. Div. 1962); Country Mutual Insurance Company v. Livorsi Marine, Inc., 856 N.E.2d 338, 343 (Ill. 2006); Mount Vernon Fire

• Ins. Co. v. King Gen. Constr., 1998 U.S. App. LEXIS 20574 (2d
• Cir. 1998).

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The Notice Prejudice Rule (cont.)

• Some jurisdictions place burden on policyholder to

prove that late notice did not prejudice the carrier

• See, e.g., Grinnell Mut. Reinsurance Co. v. Jungling, 654

N.W.2d 530, 541-42 (Iowa 2002); Ferrando v. Auto-Owners

• Mut. Ins. Co., 781 N.E.2d 927 (Ohio 2002)

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The Notice Prejudice Rule (cont.)

• Other jurisdictions impose the burden of proving

appreciable prejudice on the carrier

• See, e.g., Cooper v. Government Employees Ins. Co., 51 N.J.

86, 94-95 (1968); Resolution Trust Corp. v. Moskowitz, 868 F.

• Supp. 634, 638 (D.N.J. 1994)

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The Notice Prejudice Rule (cont.)

• At least 8 states have passed legislation concerning the

notice prejudice rule

• Maryland Ins. Code § 19-110, Massachusetts Ins. Code § 112,

Michigan Ins. Code § 500.3008, Missouri Reg. § 100-1.020, New York Ins. Code § 3420, Texas Board of Ins. Order No. 23080, Utah Ins. Code § 31A-21-312, Wisconsin Ins. Code § 631.81

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The Notice Prejudice Rule (cont.)

• Most courts have declined to apply the notice prejudice

rule to claims-made and claims-made and reported policies.

• See, e.g., Zuckerman v. National Union Fire Insurance

Company, 100 N.J. 304 (1985); Central Illinois Light Co. v. Home Insurance Co., 821 N.E.2d. 206 (Ill. 2004); Gulf v. Dolan, Fertig & Curtis, 433 So. 2d 512, 515-15 (Fla. 1983)

• For example, a lawsuit filed against an insured during

the policy period, but served after the policy period was not covered in Slater v. Lawyers’ Mutual Ins. Co., 278

• Cal. Rptr. 479 (Cal. Ct. App. 1991).

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The Notice Prejudice Rule (cont.)

• Some courts have applied the notice prejudice rule to

claims-made and claims-made and reported policies.

• See, e.g., Sherwood Brands, Inc. v. Great American Ins. Co.,

418 Md. 300 (2011); Financial Industries Corp. v. XL Specialty

• Ins. Co., 285 S.W.3d877 (Tex. Sup. Ct. 2009); Prodigy

Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. Sup. Ct. 2009); Sherlock v. Perry, 605 F. Supp. 1001 (E.D. Mich. 1985)

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Notice: to Give or Not to Give. That is the Question! Nancy R. Kornegay Brown & Kornegay, LLP Houston, Texas 713.528.3705 nkornegay@bkllp.com

Brown & Kornegay LLP

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Brown & Kornegay LLP

The Five Basic Types of Notice Provisions

1. Occurrence: “as soon as practicable” or “immediately”; 2. Claims-made: “as soon as practicable” or immediately”; 3. Occurrence reported: requires reporting of an occurrence likely to involve the policy “as soon as practicable and, in any event, during the Policy Period.” 4. Claims-made-and-reported: “as soon as practicable during the Policy Period, . . . but in no event later than ninety days after the expiration of the Policy Period or Discovery Period.” 5. Circumstance: “If, during the Policy Period, the Insureds become aware of any circumstance that may give rise to a Claim being made against the Insureds . . . shall give written notice . . . with full particulars . . . .” Many courts fail to distinguish between claims-made and claims made-and-reported policies, and speak in broad terms

• f claims-made policies. See, e.g., Prodigy Communications
• Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d

374, 380 (Tex. 2009) (citing Textron, Inc. v. Liberty Mut. Ins. Co., 639 A.2d 1358, 1362 n.2 (R.I. 1994) and discussing courts’ failures to distinguish types of policies)

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Brown & Kornegay LLP

When and Whether to Give Notice

• When and whether to give notice are two potentially thorny questions.
• When the issue of notice involves an actual “claim,” the decision is less

risky, but not without risk:

– Presumably, the policy’s definition of “claim” has been met – The insured can assess from the “claim” whether the policy’s notice requirements can be satisfied

• Is the “claim” against an insured under the policy?
• Does the “claim” allege “wrongful acts” as defined by the policy by an insured under the

policy?

– If, however, there is no assertion or threat of liability, then “claim” may not be

• satisfied. See, for example, FDIC v. Booth, in which the Fifth Circuit held that

the mere threat of liability will not necessarily develop into an actual demand for compensation and is not a “claim.” 82 F.3d 670, 675 (5th Cir. 1996) – Generally, the less the insured is able to provide notice of the specifics—the “who, what, where, why, and when” of a claim—the less likely it is that the insured can provide adequate notice

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Examples of Non-Claims: No Wrongful Act

• Consider the following typical notice of claim in a claims-made policy: “The

Insureds must , as a condition precedent to the obligations of the Insurer under this Policy, give written notice, including full details, to the Insurer of any Claim as soon as practicable after it is made.”

• Next, consider a lawsuit in which the Insured is named as a defendant but

there is no allegation in the lawsuit of a wrongful act as defined in the policy—the lawsuit makes a request for specific performance, for example.

• If the definition of claim includes “any civil proceeding commenced by

service of a complaint or similar pleading,” is this a claim?

• Does it trigger the Insured’s duty to provide notice to the insurer?
• The correct answer should be that, unless a “civil proceeding . . .” alleges

a potentially covered wrongful act by the insured, there is no “claim” and the insured’s obligation to provide notice has not been triggered

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Only Excluded Acts are Alleged: National Union Fire Ins. v. Willis

• In 1998, Willis, an insured director and officer, was sued for intentional torts
• He did not give notice of the lawsuit to his D&O carrier
• In 2000, the plaintiffs amended their petition to include a claim of negligent

misrepresentation against Willis

• He gave notice of claim under his 2000 D&O policy
• The insurer denied invoking its “related claims” provision and arguing the

negligent misrepresentation claim related back to the 1998 suit

• The Fifth Circuit upheld the trial court’s ruling in favor of National Union
• The court relied upon the 1998 policy’s notice of circumstance provision,

which stated, “If during the policy period, . . . the Insureds shall become aware of any circumstances which may reasonably be expected to give rise to a Claim . . . and shall give written notice . . . with full particulars as to dates, persons, and entities invoked . . . .”

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Notice of Circumstance: a method for attaching coverage to a claim before an actual claim is made

• Different types of circumstance-notice provisions

– Some are mandatory: the Insured “shall give notice” – Others are not: the Insured “may give notice” – Obviously, an insured risks losing coverage for a potential claim if a mandatory “circ notice” provision is ignored. See Willis discussed above. – Some invoke an objective standard for assessing whether known circumstances may give rise to a claim: “aware of any circumstances which may reasonably give rise to a Claim – Others invoke a subjective standard: “aware of any circumstances the insured believes may give rise to a Claim – Still others invoke a hybrid two-part standard: “aware of any circumstances the insured reasonably believes may give rise to a Claim”

• The wording of the “circ notice” provision determines the level of specificity

required

• There is no bright-line rule for determining the sufficiency of the notice

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Examples of Sufficient and Insufficient Notice Content

• Sufficient Notice:

– Sigma Fin. Corp. v. Am. Int’l Specialty Lines Ins. Co., 200 F.Supp. 2d 710 (E.D. Mich. 2002). The “circ notice” provision stated the insured was to

give notice of any “occurrence” of which the insured was aware that may reasonably give rise to a claim for a Wrongful Act. The court interpreted this to mean the insured need not give notice of a Wrongful Act, only an occurrence which may reasonably be expected to give rise to a claim for a Wrongful Act. A series of letters notifying the insurer of potential claims, which included a detailed account of relevant financial matters and the specific securities sales at issue was sufficient.

• Insufficient Notice:

– RTC v. Artley, 24 F.3d 1363 (11th Cir. 1994). The circ-notice provision required “written notice of any written or oral notice received from a party stating the party intended to hold insured responsible for wrongful acts.” The insured provided its insurer with financial documentation showing its loan portfolio was in trouble.

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“Best” Practices

• Review the policy. Policies that allow the insured to provide a circ-

notice are not uniform in their wording. Do you have enough information to provide an adequate notice?

• Make sure there is sufficient internal discussion about the

circumstances—gather adequate detail for the notice.

• Get outside advice from experienced coverage counsel and/or the

broker who placed the policy on the content of the notice letter. Does it satisfy the elements of the notice requirement?

• Follow up with the insurer. Make sure they received the notice. Get

their acknowledgement in writing that the notice was sufficient and

• accepted. If they decline, supplement with additional notice before

the policy expires.

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