No Coverage for Claims Reported Late, Even With Continuous Coverage from Same Carrier

Say an insured buys a claims made and reported policy, then renews it for a second policy with the same insurance company. What happens when a claim is made against the insured during the first policy year and the insured reports the claim to that same insurer in the second policy year?

Policyholders in Illinois and California recently learned in separate lawsuits that they have no coverage for that claim, even though they were continuously insured by the same carrier when all the events took place.

The most recent case was decided in a California appeals court. A convalescent home bought the policies from underwriters at Lloyd’s. With 30 days left in the first policy, the home received a letter from a lawyer announcing that he would file suit alleging negligence in caring for a resident. The court found that letter constituted first claim, but the insured didn’t report it to the insurer.

The suit was filed soon thereafter, and six days into the second policy period the insured was served with the lawsuit. While the court found that there was a grace period to report claims under the first policy, as found in many such policies, the insured still did not report the suit to the insurer.

The home’s risk manager thought she could convince the plaintiff’s lawyer to dismiss the claim, and she took a swing at it. About 41 days into the second policy period, the lawyer told the risk manager he would not dismiss the case, and she sent notice to the insurer that day.

The court began the opinion: “There is no way we can find coverage in this case.”

The first policy didn’t apply because the claim wasn’t reported during either the first policy period or the 30-day grace period after the policy expired.

The insured argued that service of the suit constituted the first claim, rather than receipt of the letter. With both the claim and the report taking place in policy two, the insured said, the claim was covered by that policy.

The court disagreed. Even if the suit was the first making of the claim, policy two would not apply because, like most claims made policies, it contained a provision eliminating coverage for acts prior to the policy’s inception that could reasonably be foreseen to result in a claim. Clearly a letter saying suit would be filed fit the bill. You can read the Goings & Goings, Inc. v. U.S. Risk, Inc. et al case at the Ross, Dixon & Bell, LLP website.

The U.S. District Court for the Northern District of Illinois reached a similar conclusion in Exec. Risk Indem. v. Chartered Benefit Servs., Inc. last summer. In that case the policyholder received a demand letter on April 22, 2002. On June 1 it renewed its policy with the insurer. Suit was filed June 17 and notice was first tendered to the insurer on October 24, 2002.

As in the California case, the federal court in Illinois found that the insured had not complied with the requirement to report the claim during the policy period in which the claim was first made.

It’s not a common occurrence for an insured to delay reporting, but it’s not terribly unusual either. We recently had an instance of a seven-month delay, with a policy expiration and renewal in the interim. Even in situations where coverage isn’t lost entirely, there can be serious consequences for an insured. One consequence may be rescission of the second policy if the insured should have disclosed the claim when seeking renewal. Even a delayed report within the same policy year that the claim was made can have serious repercussions; see our previous post discussing some of those.