Claims-Made Policies May Cover Claims Submitted Outside the Reporting Period
As a rule, liability insurance policies contain a condition requiring timely notice of a claim against the insured, so that the insurer has an opportunity to adequately investigate and defend the claim. A recurring issue is what happens when notice is not timely. Does the insured lose coverage, automatically, or only when the insurer is prejudiced by the late notice? The answer can vary depending on what state's law applies – in Wisconsin, this issue is seemingly answered not as much by policy language or case law but by two different statutes, Wis. Stat. §§ 631.81 and 632.26, each of which expressly states than an insured loses coverage only where the insurer is "prejudiced" by late notice.
With so-called "claims-made" policies, the issue can be a
bit tricky. That is because these policies are generally worded to limit
coverage to claims first made against the insured and reported to the insurer
within a defined time period – typically the policy’s policy period and an
extended reporting period. In contrast, "occurrence-based" policies by their
terms can continue to provide coverage for years, or even decades in the case of
latent injuries, since it is the policy in place at the time of an injury that
applies, even if a claim is made long after expiration of the policy. Insurers
like "claims-made" policies – and almost uniformly offer them in the area of
errors and omissions, employment practices liability and directors and officers
liability coverages – because they give the issuing insurer comfort that once
the policy expires the risk is gone and the policy can be taken off its books.
But such peace of mind exists only if the insurer can safely deny coverage on
the basis of late notice. So the question arises: is there a prejudice
requirement in a case where notice comes after expiration of a "claims-made"
policy and if so is the insurer ever not prejudiced?
A new Wisconsin Court of Appeals decision, Anderson v. Aul, No. 13AP500, 2014 WL 625676 (Wis. Ct. App. 2014) (recommended for publication), has answered that question and the answer is very favorable to insureds. The court held that Wisconsin's notice-prejudice rule applies to both occurrence-based and claims-made liability policies. Accordingly, insureds may still have coverage for claims first reported to the insurer after a claims-made policy’s reporting period.
Anderson was an attorney malpractice case. The plaintiffs wrote the defendant attorney in December 2009 claiming malpractice and demanding money. The defendant's professional liability policy covered claims-made and reported to the insurer between April 2009 and April 2010. The defendant did not provide notice until March 2011, eleven months after the policy expired. The plaintiffs filed suit in March 2012, and the defendant provided notice of the suit shortly thereafter. The insurer intervened in the lawsuit, seeking a declaration that it owed no coverage based, in part, on the defendant's failure to provide notice of the claim within the reporting period. The Circuit Court ruled in the insurer's favor despite acknowledging that the insurer likely suffered no prejudice.
The Court of Appeals reversed, deciding as a matter of law that not only did the Wisconsin notice-prejudice statutes apply to claims-made polices, but that the insurer suffered no prejudice from the delayed notice. The court noted that the insurer had adequate time to investigate and defend the claim – notice to the insurer, while late per the policy terms, came well before formal discovery or any court-ordered deadlines. The court also rejected the insurer's argument that the very nature of a claims-made policy (i.e., that it will not cover claims reported outside the reporting period) necessarily means that the insurer would suffer prejudice where notice is given outside the policy period. In other words, the court rejected the idea that an insurer's mere loss of comfort that a policy is off its books legally constitutes prejudice.
There are two points to bear in mind from this decision. First, it should in no way be taken by insureds as a license not to give notice. Prejudice is usually fact specific. Moreover, the rule in Wisconsin is not necessarily the rule in other states (and this decision could still be subject to Supreme Court review). And it is also highly likely that a failure to provide notice prior to any policy renewal will void coverage under any subsequently issued policy for misrepresentation in the application. So, as we tell all clients, give notice when you have a claim! And do it timely! Second, this decision does mean that hope remains for insureds who do not give notice within the reporting period. This could, in the right case, prove crucial. There are times, as in Anderson, where an insured may not recognize that it has received a “claim” as defined in its policy. For example, this occasionally occurs in the context of employment claims when an insured first receives a notice of an EEOC or state administrative proceeding that should have been tendered as a claim. Insureds who find themselves in this situation should still provide notice after the reporting period under the applicable claims-made policy. Unless there is actual prejudice to the insurer from the delay, coverage may still exist, even though the notice comes after the policy has expired.