Many claims-made liability-insurance policies have an important extension of coverage that enables a policyholder to lock in coverage in one year – the year that a bad situation is discovered that later may produce claims– even though claims against the insured arising from the situation are not made until after the policy period. Under “notice of circumstances” provisions, an insured can provide written notice of such a circumstance to its claims-made carrier and later-asserted claims will be deemed to have been made during the policy period in which “notice of circumstances” was given.
Insureds may want to provide notice of circumstances because it guards against the risk that a later claims-made insurer will laser-beam out eventual claims from that situation by imposing an exclusion; the later insurer may ask in its underwriting materials for the insured to identify situations that may lead to claims during the policy year – and then exclude them. Accordingly, if the insured identifies a situation that may lead to claims it may not have coverage for claims that indeed come to fruition. (If the insured fails to disclose the existence of such a situation, the insurer may later seek to rescind the policy or assert nondisclosure as a defense to performance.)
Notice-of-circumstances provisions typically require that the insured provide this notice during the policy period, which brings us to a recent decision by the New Hampshire Supreme Court. http://www.courts.state.nh.us/supreme/opinions/2005/cmc013.htm In this case, the insured consciously sought to invoke the protections of its notice-of-circumstances provision by providing written notice to the carrier. The carrier did not dispute that the content of the notice was appropriate (which is often the point of dispute) or that the relevant claims were not from the circumstances identified (another common point of dispute). Instead, the carrier refused to perform because the insured has prepared its notice on the last day of the policy period and sent it by overnight mail. The insurance company thus did not receive the notice until the day after the policy period – though the notice was prepared and sent during the policy period – and therefore, according to the insurance company, the insured had failed to comply with the notice-of-circumstances policy provision.
The case in part turns on the meaning of the word “give” as in to “give” notice to the insurance company. Once we are debating things at that level, however, we’ve already departed from practicality (or, as some have characterized, the world of the “law merchant”). The insured plainly sought to invoke the protection of the notice-of-circumstances provision, and the insurer conceded it had suffered no prejudice from what might have been a 10 hour delay in receiving notice. Yet, the New Hampshire Supreme Court denied coverage, ruling that “give” means to receive and thus the notice-of-circumstances provision had not been complied with.
Only a lawyer could have conjured this case. Presumably, if the insured had faxed the letter to the carrier, the court would have found the notice adequate. (The mailing-rule wasn’t discussed, but that rule generally goes only to proving that someone received a letter deposited in the mail, not when he or she received it.)
A somewhat related issue was decided by the 11th Circuit in an interesting case called Cast Steel v. Admiral Insurance, http://caselaw.lp.findlaw.com/data2/circs/11th/0216511p.pdf. Cast Steel involved an extended reporting period under a claims-made policy. (Actually, the policies were “claims made and reported,” which require that both the claim and the report of the claim be made in the policy period.) The policyholder had purchased consecutive claims-made-and-reported policies, and the claim was made in one policy but reported in the next one. Facially, neither policy is triggered, since both claim and report need to occur during the policy period. Had the insured not renewed the first policy, however, it automatically would have had a grace period to report claims under the first policy, a grace period that would have picked up the few hours of the “late” report. In other words, by paying an additional premium and renewing, the insured was potentially worse off than if it had not renewed at all. As the Eleventh Circuit put it, “[t]he district court’s opinion presents a somewhat alarming scenario.” (p.7)
The Eleventh Circuit concluded that the result advocated by the carrier made no sense and found that the first policy was triggered (ruling that the policy language was ambiguous). Another ground for the court’s decision that would have been available is the doctrine of disproportionate forfeiture, see Bob Works, Excusing Nonoccurrence of Insurance Policy Conditions in Order to Avoid Disproportionate Forfeiture: Claims-Made Formats as a Test Case, 5 Conn. Ins. L.J. 505 (1999). The Cast Steel case wasn’t discussed in the New Hampshire opinion but perhaps its consideration might have encouraged that court to reach a different result.