It has been a slow summer down in the swamp for Florida insurance law decisions.  It has been too hot to crank out opinions.  But now that fall is here and the mercury has dropped below 80, the decisions are starting to flow again.  A recent decision out of the Southern District of Florida, Direct General Insurance Company v. Houston Casualty Company, Case No. 14-20050 (S.D. Fla. Sept. 30, 2015), discussed the thorny notice rules under claims-made policies.

In Direct General, a PIP insurance company sought coverage under its claims-made professional liability insurance for a series of claims brought by medical providers claiming that Direct General improperly calculated PIP benefits.  Direct General was sued in two class action lawsuits, one of 2008 and one in 2012.  It promptly notified its professional liability insurer of both class actions.  Its insurer initially defended under reservation of rights, but then sought a declaratory judgment that there was no coverage.  The insurer’s defense was late notice.  The insurer argued that before Direct General was sued in the first class action in 2008, it received several “claim” letters from medical providers asserting that they had been underpaid.  While none of these medical providers filed suit prior to 2008, the insurer asserted that these prior “claims” were not timely reported because they were made several months before the first class action lawsuit was filed.  Further, a few of the claims were asserted days before the insurer’s policy incepted.

The professional liability policy had broad definitions of “claim” and “related claim”.  “Claim” was defined to include “any written demand or notice to an Insured indicating that a person or entity intends to hold an Insured responsible for a Wrongful Act.”  “Related Claim” was defined as “all Claims for Wrongful Acts based on or directly or indirectly arising out of or resulting from the same or related … series of facts, circumstances, situations, transactions, or events.”  Direct General argued that these early PIP demand letters were just garden-variety letters that a PIP insurer receives every day.  Direct General argued that it could not possibly be required to provide notice of each and every PIP demand letter in order to preserve coverage for class action lawsuits filed months or years later.

Unfortunately for Direct General, the court disagreed.  The court noted that the claim definition included any letter to the insured that asserted a wrongful act.  Indeed, this claim definition is broader than the typical claims-made “claim” definition, which usually requires a specific demand for monetary or non-monetary relief.  As a result, the court held that the insurer had no coverage for either class action lawsuit, meaning that Direct General lost coverage for over $72 million in defense and indemnity costs paid on these claims.

I explained in a previous blog entry here how the triple-trigger notice requirement works under most claims-made policies (such as professional liability, directors & officers liability, and errors & omissions liability policies).  Policyholders need to be aware that the notice requirements under these policies are very strict, and not subject to the notice-prejudice rule that applies to occurrence-based policies.  It is also important to understand that the claims-made notice requirement can be triggered by a letter or other communication stating a demand, even if no lawsuit is filed.  This is why it is important for policyholders with claims-made policies to review any potential claims before the policy period ends (or the extended reporting period, or “tail” period, ends) to determine whether notice must be provided.  When in doubt, provide the notice, even if the claim or potential claim seems insignificant.  If a later, significant claim comes in, you can be sure your insurer will seek to tie that claim back to any prior “claims”, no matter how insignificant, to try to avoid its coverage obligations.  Even if a formal “claim” has not been made, most policies allow a policyholder to make a “notice of circumstance” to preserve rights under the policy in the event of a future claim.

If the notice is not made properly, the policyholder can lose coverage not only for the claims it does not notice, but also for all related claims into the future, as was the case with Direct General.  It is just another “gotcha” brought to you by your friendly neighborhood insurer who claims to be “on your side” and promises you are in “good hands”.  If a sophisticated insurance company like Direct General can forfeit $74 million of its own coverage by not complying with its insurer’s onerous notice requirement, you can imagine how many Florida policyholders have similarly forfeited their coverage, and how many millions the insurance industry has made off of this gotcha.