AVOIDING POTENTIAL MINEFIELDS OF CLAIMS-MADE COVERAGE CLM002

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2 AVOIDING POTENTIAL MINEFIELDS OF CLAIMS-MADE COVERAGE CLM002 Kim Winter & Robert Vryhof Kim Winter, Esq., Lathrop & Gage LLP Robert Vryhof, Vice President of Risk Management, Republic Services

3 Learning Objectives At the end of this session, you should be able to: Understand the impact of differences among occurrence, pure claims-made and claims-made-and-reported policies. Anticipate potential coverage issues when switching between occurrence and claims-made policies or changing claims-made carriers. Identify provisions in claims-made policies to negotiate in order to help maximize your coverage and minimize gaps.

4 Agenda Overview of Claims-Made v. Occurrence Coverage Common Coverage Issues with Claims-Made Policies Risk Management Considerations

5 Occurrence vs. Claims-Made Occurrence-Based coverage: Triggered by alleged wrongful act during the policy period, regardless of when claim is made Sample language: We will pay those sums that the insured becomes obligated to pay because of injury caused by an occurrence during the policy period. Insurer often has to prove substantial prejudice to deny due to late notice ( notice-prejudice rule) St. Paul Mercury Ins. Co. v. Nat'l Sur. Corp., No. 1:14-CV-45, 2015 WL (N.D. W.Va. Jan. 14, 2015) (eight year delay in providing notice insufficient by itself to preclude coverage; insurer required to prove prejudice through specific actions or missed opportunities).

6 Occurrence vs. Claims-Made Claims-Made coverage: Generally triggered by claim against the insured during the policy period, regardless of the timing of the wrongful act Sample language: This insurance is written on a claims made basis and applies only to claims first made against the insured during the policy period and reported to [Insurance Company] (hereafter referred to as the "Company") as prescribed in the coverage section below. Notice provisions strictly construed by courts

7 History of Claims-Made Claims-made professional liability forms likely emerged in the mid- 40s Occurrence based coverage had been the norm In the 70s and 80s significant long-tail claims under older occurrence policies prompted insurers to offer more claimsmade coverage

8 Common Coverage Types Occurrence Commercial General Liability Umbrella Claims-Made Directors and Officers Medical and Legal Liability Employment Practices Cyber Liability Errors & Omissions Professional Liability Pollution Legal Liability

9 Two Types of Claims-Made Coverage Pure Claims-Made vs. Claims-Made-and-Reported Often what we think of when we think of Claims-Made Coverage is actually Claims-Made-and-Reported Either way, coverage is triggered by a claim asserted against the insured during the policy period, as opposed to an injury or wrongful act that occurs during the policy period

10 Pure Claims-Made Less Common Requires a claim made against insured during the coverage period, but not necessarily noticed to the insurer Sample language: This insurance is written on a claims made basis and applies only to claims first made against the insured during the policy period or any applicable extended reporting period. Delay in notification unlikely to prevent recovery, absent prejudice

11 Claims-Made-and-Reported Typical Claims-Made Coverage Requires the claim be made against the insured and reported to the insurer during the policy period or an applicable extended reporting period ( ERP ) Even a small delay in reporting may prevent recovery, regardless of prejudice to the insurer

12 Advantages of Claims Made Coverage Lower premiums Greater predictability & less volatility for insurers Fewer disputes regarding trigger May be easier to determine when a claim was made than it is to determine when an occurrence takes place Even if there is a dispute, often resolved through dispositive motions, reducing coverage litigation costs Limits more accurately based on current exposures, reducing likelihood of being underinsured later Insured may receive coverage for events predating the policy so long as claim is made during coverage period

13 Common Concerns with Claims-Made Coverage What is a claim? Late Notice/What triggers notice requirements? Is there an applicable ERP? Interrelated wrongful acts issues Coverage gaps when switching claims-made carriers or types of coverage

14 What is a Claim? Policies use a variety of language to define claim. Often claim includes one or more of the following: Written demand for monetary, non-monetary or injunctive relief Actual suit or arbitration proceeding initiated against insured Regulatory proceeding Notice of governmental investigation

15 Late Notice Reporting required as soon as practicable after learning of a claim but no later than End of policy period End of extended reporting period Policies differ on what needs to be reported: Suit, wrongful act, circumstances that are reasonably likely to become a claim, written demand, etc.

16 Late Notice Notice requirements before policy expiration strictly construed in most jurisdictions Notice-prejudice rule typically not applied, potentially leading to harsh results Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So. 2d 512 (Fla. 1983) (Failure to report claim by end of policy period on November 20, 1979 precluded coverage despite fact that insured received the claim on November 19, 1979) Notice may be required before a suit is filed Don t forget about excess carriers

17 Internal Notice Requirement Notice required as soon as practicable, or immediately in addition to before policy ends, arguably precludes insured from waiting until end of policy period to provide notice However, notice-prejudice rule often applies to these more stringent notice requirements in Claims-Made policies

18 Does the ERP Apply? Automatic ERP: Fairly standard, but may not be as useful as many insureds believe Star Ins. Co. v. Berry Ins. Agency, 252 Fed.Appx. 939 (10 th Cir. 2007) (Automatic ERP only applied to claims made and reported during the ERP) No additional premium Often days Usually applies only if policy is cancelled or not renewed; and sometimes only applies if no other similar coverage is purchased

19 Does the ERP Apply? Optional ERP: Additional premium may be significant Often available for 1-3 years terms Creates tail or extended coverage under expiring policy May not be available (or necessary) when purchasing replacement coverage with same or unlimited retroactive date or broad coverage for prior acts

20 Interrelated Wrongful Acts Common provision in Claims-Made policies that deems claims asserted in one policy period as if they were made during the earliest policy period in which a similar/related claim was made and noticed Sometimes referred to as a "Prior and Pending Proceeding" exclusion Sample definitions: [A]ny Wrongful Acts that are similar, repeated or continuous; or connected by any reason or any common fact, circumstance, situation, transaction, casualty, event, decision or policy or one or more series of facts, circumstances, situations, transactions, casualties, events, decisions or policies. All claims arising from the same wrongful act or interrelated, repeated or continuous wrongful acts of one or more insureds....

21 Interrelated Wrongful Acts Policy language is often broad, but many courts require common factual nexus WFS Fin., Inc. v. Progressive Cas. Ins. Co., 232 F. App'x 624, 625 (9th Cir. 2007) (Two separate class actions, filed in separate forums, under different legal theories deemed one claim under interrelated wrongful acts provision because they were both based on insured s practice of allowing independent auto financers to mark up loans) Current insurer often has incentive to argue claims that are tangentially related back to earlier policy periods

22 Interrelated Wrongful Acts Language differs from policy to policy, which could arguably create a gap Similar claims pushed into earlier policy periods may exhaust each claim or aggregate limits Consider exhaustion of limits against high each claim retentions when faced with multiple, similar claims

23 Class Actions Considerations Is class action a single claim or multiple? Am. Med. Sec., Inc. v. Executive Risk Specialty Ins. Co., 393 F. Supp. 2d 693 (E.D. Wis. 2005) (Thirty-nine individual and class action suits deemed related as arising out of same wrongful acts) What if putative class action filed but not certified, or certified but individuals opt out? Berres v. Artifex, Ltd., 21 F. Supp. 2d 909, 914 (E.D. Wis. 1998) (applying California law and finding although class not certified, receipt of class action complaint by insurer sufficient to comply with policy s notice requirement with regard to other claims arising out of the same events, including later claims of unnamed class members) but see Staudt v. Artifex Ltd., 16 F. Supp. 2d 1023, 1036 (E.D. Wis. 1998) (applying California law and finding that receipt of class action was insufficient to comply with notice requirement to secure coverage for later-filed complaints of unnamed class members).

24 Beware of Gaps: Switching Claims-Made Carriers Switching to policy with a retroactive date from one with full prior acts coverage Different definitions of claim and reporting thresholds - Claims often develop over time - New insurer may argue knowledge of circumstances falls within a known prior acts exclusion RC Investments, Inc. v. St. Paul Fire & Marine Ins. Co., No. 04-CV-5030-AAM, 2005 WL , at *10 (E.D. Wash. May 11, 2005) (Insured s disclosure of claim to agent did not preclude application of the policy s known wrongful acts exclusion) Be mindful of differences in interrelated wrongful acts provisions broader language in current policy vs. narrower language in earlier policy

25 Beware of Gaps: Claims-Made to Occurrence New occurrence policy effective 1/1/2015 through 1/1/2016 Wrongful act took place on 12/20/2014, but was not known to insured or reported to then-current claims-made policy effective 1/1/2014 through 1/1/2015 Underlying claimant brings claim on 4/1/2015, beyond any ERP Claims-made policy is not triggered, because the claim was not made during the policy period (and no notice of circumstances was given) New policy arguably not triggered either, because the occurrence predates the policy

26 Risk Management Overview Consider potential gaps before switching between occurrence and claims-made coverage or between claimsmade carriers Know your notice provisions and policy expiration dates Try to negotiate for full prior acts coverage or a continuous retroactive date Consider purchasing Tail/ERP if needed

27 Notice Considerations Make sure all employees are aware of procedure for notice and importance of timely notice Give notice of a claim to all potentially relevant carriers ASAP -Consider potentially related claims under prior claims-made policies -Earlier occurrence-based and current claims-made policies triggered? -Consider all coverage lines that may be implicated Consider whether appropriate to give notice of circumstances if claim not already asserted

28 Notice Considerations Err on the side of caution when in doubt, give notice Most insurers will not penalize an insured for providing notice if no claim is paid under the policy. Insurers may offer free assistance in responding to your claim/preparing for claim. For example: Insurers may have a hotline to help respond to a potential cyber liability tip or employment practices claim. Consider a laundry list report before policy expiration date Notify claims-made excess policies before expiration, regardless of other notice threshold At renewal, purchase policies with notice of circumstances / potential claims reporting

29 Full Prior Acts When purchasing claims-made coverage, try to negotiate full prior acts coverage to eliminate gaps Alternatively, if you switch claims-made carriers, negotiate a continuous retroactive date from the date of your first claimsmade policy Worst case scenario to avoid: switching from full prior acts coverage/no retroactive date to a policy with retroactive date as day of issuance and known prior acts exclusion

30 Tail Coverage/Optional ERP Purchase coverage to fill the gap when switching or cancelling coverage Conduct must still occur before policy s termination Commonly run for 1 or 2 years, up to 6 or 7 years and longer -consider types of exposure and typical statute of limitations -possibility of claims by minors that extend the statute of limitation? Check policy for deadline to purchase Optional ERP (often only days or possibly even before expiration) May be expensive, but may be necessary to avoid coverage gaps

31 Questions?