I have discussed before late notice issues under general liability policies. The basic rule is that a policyholder needs to give its insurer notice “as soon as practicable” after a claim is made, which typically means within a few months. Under an occurrence-based policy such as a Comprehensive General Liability policy, if the claim is reported months late, the policyholder does not automatically lose coverage. An insurer can waive the defense of late notice if the insurer is late in notifying the policyholder of the defense (the “two-wrongs-make-a-right” rule). Also, even if the insurer timely raises the defense, under the notice-prejudice rule, the insurer must be prejudiced by the late notice to avoid coverage obligations. In Florida, prejudice is presumed when notice is late, but a policyholder can overcome this presumption by proving that the insurer was not prejudiced.
Claims that arise under a claims-made policy are different. Policies that are typically written on a claims-made form include Directors & Officers, Professional Liability, Employment Practices Liability, and Environmental Liability insurance. Most policyholders are not aware of the differences between occurrence-based and claims-made policies for notice purposes. Claims-made policies are different from occurrence-based policies in that they require a “double trigger”: the claim must be made and the notice must be provided within the policy period for the coverage to be triggered. (Actually, many claims-made policies are “triple trigger” policies, in that they also require that the act giving rise to the claim occur after the policy’s “retroactive date” — but that is a discussion for another day.) If the notice is not provided before the policy expires then a condition precedent to coverage has not occurred and the policy does not respond. In Florida, and most jurisdictions, when the notice is provided outside of the claims-made policy period, even by a day, the policyholder forfeits its coverage, regardless of whether the insurer was prejudiced. It is an unforgiving rule.
To make matters worse, claims-made policies typically define a “claim” to be something short of a lawsuit. A letter complaining about a company’s practices, making a demand for compensation or non-monetary relief, or even a request to extend a statute of limitations can be considered a “claim” even though no lawsuit is filed. It is particularly difficult under a Professional Liability policy to determine whether comments or e-mails from an unhappy client constitute a “claim”. If a policyholder does not recognize that a “claim” has been made, and does not provide notice to its insurer until after the policy has expired, coverage is forfeited. This is the case even if the policyholder renews the policy with the same insurer the following year.
This discussion leads me to a recent decision from the Eleventh Circuit (applying Florida law) in The Zodiac Group, Inc. v. Axis Surplus Inc. Co., 2013 WL 5718439, Case No. 13-10941 (11th Cir. Oct. 23, 2013) (“Zodiac”). Zodiac involved a psychic who sued a psychic network for continuing to use her image after her endorsement deal had expired. The psychic filed suit originally in April 2008, but the case was dismissed without prejudice for lack of prosecution in November 2009. In January 2010, the psychic again filed suit, alleging more or less the same claims, although she added as defendants to the second suit the owners of the psychic network.
Axis provided Professional Liability coverage to Zodiac in two consecutive policies: one running from October 1, 2008 to October 1, 2009, and another from October 1, 2009 to October 1, 2010. It is not clear from the opinion whether Zodiac had coverage prior to October 2008 or if it provided notice to its carrier on the risk prior to Axis. In any event, Zodiac provided notice to Axis of the institution of the second lawsuit in January 2010.
The district court determined that the policyholder’s coverage was lost because the second lawsuit was related to the first lawsuit, and notice of the first lawsuit was not provided timely. The Eleventh Circuit affirmed the decision.
The policy stated that all wrongful acts “related by common facts, circumstances, transactions, events and/or decisions” are considered to be a single wrongful act. Further, the policy stated that claims arising from the same wrongful act were deemed to have been made when the first related claim was made. Thus, since no notice was provided of the first lawsuit, the policyholder lost out on coverage not only for that first lawsuit, but for the second lawsuit as well. The individual owners lost out on coverage too, even though they were not named as defendants in the original lawsuit. The court’s reasoning was that the focus is on the “wrongful act” and not the identity of the defendants that are sued. This part of the decision seems poorly reasoned, but the court appears to have concluded that, despite the addition of the new parties, the claims remained the same.
What could the policyholder have done here to save its coverage? Well, for starters it is unclear whether Zodiac had Professional Liability insurance at the time of the first lawsuit. If it did not then that was its mistake (or its broker’s mistake) for going bare. If it had this coverage prior to Axis, then it should have noticed the earlier insurer. Zodiac may also have had general liability insurance for the claims asserted, but that was not discussed in the opinion.
It is important for policyholders with claims made coverage to monitor closely any claims or potential claims made against them during the course of the policy period. It is a good practice to take stock in what claims may exist during renewal time (typically 1-2 months before policy expiration), to ensure that all claims are noticed before the policy expires. Even if a formal “claim” has not been made, if a policyholder is aware of circumstances that come to light that might lead to a claim, most claims-made policies allow a policyholder to make what is called a “Notice of Circumstance”. A Notice of Circumstance is a policyholder’s opportunity to place its chip within the expiring policy, so that if a claim is later made the earlier policy will respond. A Notice of Circumstance must be detailed, and cannot be a laundry list of potential claims. Properly made, detailed Notices of Circumstance can help policyholders avoid late notice defenses without negatively impacting their claims history.
It is also important to note that the “interrelated wrongful acts” clause in a claims-made insurance policy does not always benefit the insurer. Policyholders can make use of this clause to minimize retentions, and also to relate back later claims to an earlier period when notice was provided and coverage limits or terms may be move favorable. Experienced coverage counsel can often save coverage that otherwise would be lost, and, if consulted early enough, can help policyholders navigate the maze of important decisions required under a claims-made program, and prevent later coverage disputes or forfeitures.