In This Issue:

• Two Years, Too Long for Coverage Under Claims-Made-and-Reported Policy
• Excess Policy Didn't Follow Form to Primary's Claims-Made-and-Reported Requirement, so Insured's Failure to Provide Notice During Policy Period Was No Defense to Coverage
• Jury Finds No Prejudice Caused by Two-Year Delay in Notice Following Fire; Eighth Circuit Upholds Verdict
• Insurer Given Late Notice of Workers' Comp Claim and Denied Right to Intervene in Underlying Proceeding Still Liable Under Policy

Two Years, Too Long for Coverage Under Claims-Made-and-Reported Policy

Why it matters: Claims-made-and-reported policies require that the claim be both made against the insured and reported to the insurer within the policy period. A recent California decision confirmed that where these two conditions are not met, the equitable excuse rule (developed by a California state court) would apply only in narrow circumstances not present in the instant dispute. Here, a lawyer missed several deadlines after filing a civil rights lawsuit and the case was dismissed. After the Ninth Circuit Court of Appeals affirmed dismissal, the client filed a malpractice suit against the lawyer resulting in a default judgment. The client later attempted to enforce the default judgment against the malpractice insurer, which objected arguing that the claim had been neither made against the insured attorney nor reported to the insurer during the policy period. A California federal court sided with the carrier and rejected attempts to squeeze the case within the equitable excuse rule.

Detailed discussion: Mercury Marilla retained B. Kwaku Duren to file a civil rights lawsuit in May 2009. The next month, Duren took out a legal malpractice policy from Arch Insurance Company (AIC) with coverage from May 20, 2009, through May 20, 2010, insuring him for up to $300,000.

The policy stated: "This is a claims-made and reported policy. … The policy is limited to liability for only those claims that are first made against the insured and reported to the company during the policy period unless and to the extent that an extended reporting period option applies."

Duren missed several deadlines with regard to Marilla's lawsuit, and a federal court judge dismissed the complaint in November 2009. The Ninth Circuit Court of Appeals affirmed the dismissal in January 2012.

A few months later, Marilla filed a legal malpractice suit against Duren in California state court. The lawyer failed to respond and a default judgment of $250,480 was entered against him in January 2014. Marilla later learned about Duren's policy with AIC and assigned his rights to the default judgment to a third party, Michael Petersen.

Petersen filed a claim with AIC but the insurer rejected it; Petersen then filed suit in California federal court alleging breach of contract.

Considering AIC's motion to dismiss, U.S. District Court Judge Otis D. Wright II noted the parties did not dispute that the policy was a claims-made-and-reported malpractice insurance policy and that no malpractice claims were asserted against Duren or reported to AIC during the coverage period.

Despite this, Petersen told the court that he should be equitably excused from making a timely claim, that a claim filed timely would have constituted "an idle act," and that the policy terms were unconscionable as applied to him. The court rejected each of the plaintiff's arguments.

Marilla (or Petersen) had no knowledge of the insurance policy, the plaintiff contended, which made it impossible to make a claim with AIC and report it during the coverage period. But lack of knowledge about the policy "was not an actual or legal barrier to filing a suit," Judge Wright wrote, and Marilla "could have sued Duren whether he knew about the policy or not. It was not 'impossible' for Marilla to satisfy at least the claims-made requirement under the Policy." Petersen's lack of knowledge was "utterly irrelevant" as a third-party assignee of the default judgment that did not obtain any legal rights until the assignment, the court added.

The court distinguished a case that equitably excused the making of a timely claim (Root v. American Equity Specialty Ins. Co., 130 Cal. App. 4th 926 (2005)) based on the facts. In Root, an attorney was sued just three days before his policy expired and when the attorney learned about the complaint two days after the expiration, he immediately reported it to his insurer.

"The facts of this case are a far departure from Root and do not warrant the application of the equitable excuse rule," Judge Wright said. "Marilla's malpractice lawsuit was filed two years after the coverage period terminated, and it was reported to [Arch] four years after the coverage period terminated. … While the relevant delays in Root were measured in hours, the delays in this case are measured in years. Thus, equity does not require the Court to excuse both the claim and reporting requirements in the Policy."

Filing the malpractice suit prior to the Ninth Circuit's affirmation of the civil rights lawsuit dismissal did not constitute an "idle act," the court said. Although Petersen argued that his suit would have lacked ripeness prior to the federal appellate court's order, the court said Duren's malpractice was "complete and final" when he missed the deadline to file an opposition to a motion to dismiss the civil rights lawsuit.

"While the appeal could have reopened Marilla's case, and thus limited the malpractice damages, it could not reverse Duren's breach of duty to his client," the judge wrote. "Marilla was not prohibited under any law from sending Duren a letter demanding compensation for his failure to adequately perform—a 'claim'—in the fall and winter of 2009. There was also nothing prohibiting him from bringing a lawsuit. There is no allegation that Marilla made any type of claim during the coverage period. The insurable event under the Policy was the assertion of a claim during the policy period and no such claim was made."

Petersen's final argument—that the policy's claims-made-and-reported provisions were unconscionable as applied to him, a third-party beneficiary—also failed to sway the court. "Petersen's role in this case is limited," Judge Wright wrote. "He was assigned Marilla's rights under the default judgment and not the Policy. Petersen was, and remains, a complete stranger to the contract entered into between AIC and Duren. As such, AIC owes no obligation to Petersen."

The plaintiff did not explain how AIC was supposed to notify him of the policy terms back in 2009, the court said, particularly as the insurer first learned of the assignment in 2014.

"The Court is sympathetic to Marilla's inability to recover for the harm he suffered," the court noted. "Duren's alleged conduct is abhorrent, at a minimum. However, recovering from AIC is not possible under the law."

To read the order in Petersen v. Arch Insurance Company, click here.

Excess Policy Didn't Follow Form to Primary's Claims-Made-and-Reported Requirement, so Insured's Failure to Provide Notice During Policy Period Was No Defense to Coverage

Why it matters: Read your policies carefully: A "follow form" excess policy may not actually follow form in some surprising and significant ways. The insureds in this coverage dispute successfully demonstrated that the claims-made-and-reported nature of the primary policy had not, in fact, been incorporated into the excess policy. Accordingly, the insureds' failure to provide written notice to the excess carrier during the policy period of underlying claims brought by multiple governmental entities was no defense to coverage, and the trial court entered judgment in the insureds' favor accordingly. A Texas appellate court affirmed the decision on appeal.

Detailed discussion: In March 2004, Sabre Holdings LLC and related company Travelocity.com LLC obtained a primary insurance policy from American International Specialty Lines Insurance Company (AISLIC) and an excess policy from Illinois Union Insurance Company. Both policies ran for the period of March 15, 2004, until March 15, 2005.

When Sabre was sued by multiple government entities in December 2004 for allegedly failing to fully remit hotel taxes collected from consumers, the insured provided written notice to AISLIC. The primary insurer accepted defense of the suits and made payments totaling $15 million, the policy's limit, for defense costs.

Sabre sent a letter to Illinois Union in December 2010 to notify the excess insurer that it expected to exhaust its primary policy. But the excess insurer denied coverage, taking the position that its policy was a "follow-form" policy, meaning it replicated all of the terms and conditions of the primary policy—including the requirement to provide written notice of a claim during the policy period.

Sabre responded with a declaratory judgment action that it was entitled to coverage for defense costs. Ruling on the policyholder's motion for summary judgment, a Texas trial court judge sided with Sabre, and the appellate court affirmed.

The court first examined the language of the excess policy, which stated it was a claims-made policy and that the insurer agreed "to provide insurance coverage to the Insureds in accordance with the terms, definition, conditions, exclusions and limitations of the Followed Policy, except as otherwise provided herein."

That section was amended by a Non-Follow Form endorsement that read in part: "the Insurer agrees to provide insurance coverage to the insureds in accordance with the terms, definitions, conditions, exclusions and limitations of the Followed Policy … However, the Insurer shall not provide Insurance coverage to the Insureds in accordance with the terms and conditions … as set forth in the endorsement of the [AISLIC] policy."

"The language added by the endorsement at first glance appears to render the insuring clause ambiguous," the court said. "It seemingly contradicts itself, stating that the excess policy follows form to the primary policy, yet does not follow form to the primary policy." Given this confusion, the court dug deeper.

"Upon close inspection of the two parts of the clause together, it can be discerned that three key words are not included in the nonfollow form language that are included in the follow form language: definitions, exclusions, and limitations," the panel wrote. "Thus, the insuring clause as amended by the endorsement could be reasonably interpreted to mean that the excess policy follows form to the definitions, exclusions, and limitations of the primary policy but not the terms and conditions of the primary policy. Because the reporting requirements in the primary policy are more properly characterized as conditions rather than definitions, exclusions, or limitations, the amended insuring clause can be read as not incorporating the notice conditions of the primary policy."

The court recognized that this interpretation appeared to conflict with other sections of the policy but said it was "the only reasonable way to resolve the apparent conflict in the two sentences of the clause."

Adopting this reading, the panel held "that the excess policy, regardless of any apparent intent between the parties, does not follow form to the reporting requirements in the primary policy," and turned to the notice provision in the excess policy itself.

The excess policy contained a stand-alone notice provision stating that notice "shall be given as provided in the Followed Policy" as well as two additional sections that required the giving of notice when changes to the policy occurred such as receivership or when the aggregate limit of liability on an underlying policy is exhausted. In those circumstances notice was required "as soon as practicable."

There were no corresponding notice provisions in the primary policy.

These notice provisions were fact-specific and controlled over the more general provision that Illinois Union argued incorporated the claims-made-and-reported notice provisions of the primary policy, the court said. According to the rules of construction of insurance policies, specific provisions trump more general provisions, the panel explained.

"The general notice provision in the excess policy requiring that notices under the excess policy be given as provided in the primary policy could not apply to the specific provision regarding the exhaustion of limits when there is no corresponding provision in the primary policy," the court added, affirming judgment for the policyholder.

To read the opinion in Illinois Union Insurance Company v. Sabre Holdings, click here.

Jury Finds No Prejudice Caused by Two-Year Delay in Notice Following Fire; Eighth Circuit Upholds Verdict

Why it matters: Late notice? No prejudice? No problem. So a jury found when it voted in favor of coverage, and the Eighth Circuit Court of Appeals agreed. The insurer of a soybean manufacturer was not prejudiced by its insured's late notice of a fire at a country club that caused almost $4 million in damage even where the insured's liability carrier did not receive notice for two years following the fire. The evidence at trial—including photos, physical evidence, and the descriptions of the investigation procedures conducted by the fire marshal as well as the country club's own insurer—demonstrated that the manufacturer's insurer was able to conduct a "thorough and meaningful" investigation.

Detailed discussion: Asoyia, Inc., an Iowa producer of soybean oil, purchased a general commercial liability policy from Michigan Millers Mutual Insurance Company in 2006.

On June 18, 2007, a fire destroyed the location of one of Asoyia's customers, the Sunnyside Country Club. The club's property insurer, United Fire & Casualty Company, conducted a preliminary investigation of the fire and determined that the loss was covered by the policy, paying Sunnyside's claim. The fire was also investigated by the local fire marshal.

United Fire sent subrogation notices to several parties, including Asoyia, in late June 2007 and said that they could participate in the ongoing investigation. The soybean manufacturer did not respond, nor did it notify its liability carrier—Michigan Millers—of the subrogation demand. No one from or on behalf of Asoyia participated in the fire investigation.

Sunnyside was entirely repaired in the summer of 2008. In 2009, United Fire sued Asoyia in Iowa state court contending that the fire started due to spontaneous combustion of recently laundered kitchen rags that had been used to clean a fryer that contained Asoyia's soybean oil. Asoyia promptly notified Michigan Millers of the suit, and Michigan Millers filed a lawsuit action seeking a declaration of no coverage based on late notice.

At trial, Michigan Millers argued that the delay between the fire in June 2007 and May 2009, when it received notice from Asoyia, resulted in prejudice and it thus had no obligation to provide coverage in the pending lawsuit against the insured. Sunnyside was fully repaired before Michigan Millers received notice about the fire, the insurer said, and the existing investigations failed to adequately preserve evidence of causation, leaving the insurer deprived of the opportunity to conduct its own investigation.

United Fire told the jury that the investigations carried out by both its experts and the fire marshal were thorough and based upon well-preserved evidence. Hundreds of photographs were taken, interviews were conducted with the firefighters and employees, and debris from the site—including the rag pile and key electrical system components—were all still available. A jury concluded that Michigan Millers was not prejudiced by the delay, and the federal court judge entered judgment in Asoyia's favor.

Michigan Millers appealed to the Eighth Circuit Court of Appeals.

The special verdict form asked the jury to answer two questions: (1) "Did Defendant United Fire prove facts which show that Plaintiff Michigan Millers was not prejudiced by delayed notice of the fire?" and (2) if so, "Did Plaintiff Michigan Millers prove that it was actually prejudiced by delayed notice of the fire?"

It was not unreasonable for the jury to determine the insurer suffered no prejudice from Asoyia's delay in giving notice, the three-judge panel said.

"Faulting what it saw as Michigan Millers's tactical refusal to investigate, United Fire maintained Michigan Millers merely complained of potential prejudice from a variety of sources, but failed to show any actual prejudice ever materialized," the court said. "Although Michigan Millers may have been correct in proclaiming in its closing argument that the question of prejudice was 'a close call' for the jury in weighing the evidence, we conclude the evidence adduced at trial amply supported the jury's verdict."

To read the opinion in Michigan Millers Mutual Insurance Co. v. Asoyia, Inc., click here.

Insurer Given Late Notice of Workers' Comp Claim and Denied Right to Intervene in Underlying Proceeding Still Liable Under Policy

Why it matters: The Nebraska Supreme Court upheld an insurer's duty to defend even though the policyholder did not provide timely notice of the underlying litigation because of confusion about the carrier at the time of the occurrence. After 30 years of employment, a worker suffered permanent hearing loss in both ears. During his time at the company, ownership changed hands more than once. So when the employee filed suit, the current owner tendered the claim to what they thought was the correct insurer. Not until several years later and liability had been decided did the parties realize that a different insurer was the carrier during the relevant time period. The correct insurer balked at being added to the litigation, arguing that it didn't even receive notice of the claim until after the award was entered. But the state's highest court held that the correct insurer wasn't deprived of its due process rights and had substantially the same interests as the other insurer that provided a defense for the policyholder. It was undisputed that the correct insurer was the sole provider of coverage during the relevant time, the court said, affirming a ruling that it was solely responsible for the award.

Detailed discussion: James E. Risor worked at a boiler manufacturing plant in Lincoln, Nebraska, from 1973 until 2004. During the course of his employment, Risor suffered permanent hearing loss in both ears. He filed a claim against his employer—colloquially referred to as Nebraska Boiler—in the Nebraska Workers' Compensation Court in January 2004, listing the date of his injury as 2001.

The plant was owned by several different entities during Risor's 30-year employment, and multiple companies provided workers' compensation insurance coverage to the plant over the years. The current owners of the plant, Cleaver-Brooks, Inc., purchased it from an entity known as National Dynamics in 1998. When the company sold, National Dynamics entered into an agreement with Twin City Fire Insurance Co. to provide coverage for claims made by employees working at the plant from 1992 to 1998. Cleaver-Brooks contracted with American Insurance Company to provide coverage from 1998 through 2002.

Cleaver-Brooks tendered Risor's workers' compensation claim to both insurers and each retained separate counsel. However, during the course of the litigation American operated under the mistaken belief that it had provided workers' compensation insurance coverage for the plant from 1992 to 1998.

In April 2006, a judge of the compensation court determined that Risor was permanently and totally disabled as a result of the hearing loss, setting the date of the accident as October 19, 1993. The date came as a surprise to the parties; even Risor had alleged his injuries started much later, in 2001.

After the order was filed, an adjuster for American realized that the carrier was not the plant's insurer at the time of the injury. Twin City was given notice of the claim on August 1, 2006, and subsequently filed a motion to participate as a party in the appeal to the review panel. That motion was denied and Twin City did not participate in Risor's appeal, where the review panel affirmed the date of Risor's injury as 1993.

Cleaver-Brooks then filed a declaratory judgment action in Nebraska state court for a judicial determination as to which party or parties were liable for Risor's claim. The various parties filed motions for summary judgment, and a trial court judge issued an order finding that Twin City was solely liable for the award.

Twin City appealed. The delay by Cleaver-Brooks in providing notice to Twin City was inexcusable, the insurer argued, judicial estoppel should prevent the order finding it solely liable for Risor's claim, and it could not be liable as Risor referenced the incorrect name of the employer on his workers' compensation form.

But the Nebraska Supreme Court disagreed, affirming Twin City's liability.

Twin City was not deprived of its right to procedural due process when its motion to intervene in the proceedings was denied, the court explained, because American had the same interests in defending the suit. From Risor's perspective, he simply wanted to receive compensation for his injury, regardless of who owned the plant or who the insurer was.

"The compensation court found that Risor's injury occurred in 1993," the court said, and "it is undisputed that Twin City, through its policy with National Dynamics, was the sole provider of coverage for workers' compensation claims for employees working at the plant during that time period. Therefore, Twin City is liable for the award and cannot elude payment by relying on a technical inaccuracy, the designation of [National Dynamics], rather than Nebraska Boiler, as the employer in Risor's claim."

As for Twin City's equitable defenses, the court rejected the argument that Cleaver-Brooks was asserting an inconsistent proceeding by accepting American's defense in the workers' compensation proceedings and now seeking Twin City's responsibility for the claim.

"[B]ad faith or an actual intent to mislead on the part of the party asserting inconsistent positions must be demonstrated before the judicial estoppel doctrine may be invoked," the court wrote. "In this case, we find no evidence of any bad faith or an intent to mislead on the part of either Cleaver-Brooks or American. In fact, it was in neither Cleaver-Brooks' nor American's interest to initially represent to the compensation court that Cleaver-Brooks owned the plant or that American's policy covered the plant in 1993."

At the time of the original workers' compensation trial, the parties believed the earliest possible date of Risor's injury was 2001, and only after the compensation court determined the date of the injury did the parties realize their error about the appropriate carrier. "Further, American's attorney sought to correct the information once the mistake was uncovered," the court said. "There is no reason to believe that Cleaver-Brooks or American intentionally misrepresented the facts in order to mislead or gain some type of advantage."

Twin City's laches argument met a similar fate. Twin City could not prove that any delay in notification by Cleaver-Brooks and American was inexcusable and that Twin City was prejudiced by the delay.

"Because the original dates of the alleged injuries in Risor's claim were all while Cleaver-Brooks owned the company, Cleaver-Brooks or American had no reason to notify Twin City until the compensation court determined the date of the injury to be in 1993," the court said, and Twin City was notified of the claim within four months of the determination.

"Even if Cleaver-Brooks had some reason to know before the trial court entered its award that there was a potential claim for which Twin City could be liable, the evidence still does not establish that Twin City was prejudiced by any delay," the Nebraska Supreme Court wrote. "American 'vigorously defended against Risor's claim' and the outcome likely would not have differed had Twin City participated."

Finally, the state's highest court found that neither Cleaver-Brooks nor American negligently injured Twin City by failing to provide notice of Risor's claim. "Twin City cites to no case law in Nebraska, or any other jurisdiction, which has found that one insurance company owes a duty to notify another insurance company of potential claims," the court said, with no case law supporting the contention that Cleaver-Brooks owed a duty either.

"Given the facts of this case, when presented with a workers' compensation claim alleging injuries that occurred no earlier than 2001, Cleaver-Brooks and American could not have reasonably been expected to notify Twin City, an insurer which covered claims arising from the plant only between 1992 and 1998," the court concluded.

To read the decision in Cleaver-Brooks, Inc. v. Twin City Fire Insurance Co., click here.