In its recent decision in Sollek v. Westport Ins. Corp., 2012 U.S. Dist. LEXIS 157649 (S.D. Miss. Nov. 2, 2012), the United States District Court for the Southern District of Mississippi had occasion to consider the conditions precedent to coverage under a claims made and reported policy.
The insured, Vann Leonard, was insured under a legal malpractice policy issued by Westport Insurance Company for the period April 8, 2010 to April 8, 2011. In 2006, Leonard had been retained by Gilbert Sollek to negotiate a home equity loan and to make the subsequent monthly payments on the loan. In May 2011, Leonard was arrested for embezzling client funds. While incarcerated, he failed to make Sollek’s monthly payment. Sollek learned of this on May 5, 2011 – nearly a month after the policy expired – and he later filed suit against Leonard on May 31, 2011. Leonard was served with the complaint on June 2, 2011 while he was in jail, and he later faxed a copy of the suit to Westport on June 15, 2011. At the time, Westport had been defending Leonard in connection with other suits arising out of his alleged embezzlement scheme. Westport, however, later disclaimed coverage for all such suits, including Sollek’s, on the basis of a criminal acts exclusion in the policy. Notably, the disclaimer did not address the issue of when Sollek’s claim was first made and reported. Solleck later brought a declaratory judgment action against Westport challenging the validity of Westport’s disclaimer to Leonard.
Westport moved for summary judgment on the basis that Sollek’s claim was not first made or reported during the policy period as required by the policy’s insuring agreement. The court began its decision by noting that Mississippi’s Supreme Court had not yet had occasion to interpret a claims made and reported policy. It nevertheless observed that courts and commentators generally acknowledge that “both the making and reporting of the claim within the specified period” are considered essential elements of coverage under such policies. The court agreed that Mississippi courts would follow this majority rule.
After concluding that the Westport policy was unambiguous and required the claim to be first made and reported during the policy period, or that notice of potential claim be given during the policy period, the court considered whether these conditions precedent to coverage were satisfied. Sollek conceded that he had failed to assert a claim against Leonard prior to the expiration of the Westport policy, and as such the date on which the claim was reported to Westport was irrelevant. He nevertheless argued that Westport received notice of a potential claim during the policy period such that it had a coverage obligation to Leonard for the subsequently made claim. The Westport policy indeed contained a notice of potential claim provision stating:
[i]f, during the current POLICY PERIOD, any INSURED first becomes aware of a POTENTIAL CLAIM and gives written notice of such POTENTIAL CLAIM to the Company during the current POLICY PERIOD, any CLAIMS subsequently made against any INSURED arising from the POTENTIAL CLAIM shall be considered to have been first made during the POLICY PERIOD the INSURED first became aware of a POTENTIAL CLAIM.
The court found this provision to unambiguously require that the notice of potential claim be given to Westport prior to the policy’s expiration, and that this notice be given to Westport in writing. The court also observed that the policy’s notice provision, applicable to claims or potential claims, required the insured to report specific information, including a description of the claim and alleged wrongful act, a summary of the relevant facts, potential damages, etc. The court concluded that because Westport did not receive written notice of a potential claim during the policy period, or the specific information required by the notice provision, the policy was not triggered.
In so concluding, the court rejected Sollek’s argument that there was “substantial compliance” with the policy’s reporting requirement concerning potential claims since Leonard’s defense counsel, appointed by Westport to defend different lawsuits, had become aware of Sollek’s potential claim during the policy period. The court did not agree that defense counsel could be considered Westport’s agent for the purpose of giving notice under the policy, and it also observed that there was no evidence that defense counsel had, in fact, learned of Sollek’s potential claim prior to the policy’s expiration. More significantly, the court rejected the insured’s entire theory of “substantial compliance,” noting that there was no authority to support the “finding that substantial compliance applies with a claims-made and reported policy when the insurer learns of a potential claim but receives no report from the insured” and that any such rule would be contrary to the contractual requirements set forth in the policy.
Sollek argued in the alternative that the doctrines of waiver or estoppel precluded Westport from denying coverage on the basis of when the claim or potential claim was first made and reported, since Westport had failed to identify this coverage defense in its initial disclaimer letter to Leonard. Citing to various case law from the federal and state level, the court observed that waiver and estoppel cannot be used to expand a policy’s coverage, although an insurer can waive compliance with policy conditions. While noting it to be a matter of first impression under Mississippi law, the court agreed that the reporting requirements in a claims made and reported policy are inherent to the policy’s scope of coverage and thus cannot be subject to waiver or estoppel, explaining that:
… allowing waiver or estoppel to nullify these requirements would fundamentally change the nature of the insurer's risk. It would likewise expand coverage beyond the scope of the bargain. Neither waiver nor estoppel create coverage in this context.