Why it matters: The nature of claims-made policies often complicate issues of coverage for claims asserted against the insured late in a policy period. In this case, which is illustrative, a Louisiana federal court denied an insurer’s motion for summary judgment seeking to preclude coverage for a late-asserted claim. The claims-made policy at issue covered the period from December 31, 2012 to December 31, 2013. The insured was named as a defendant in a class action lawsuit on December 18, 2013, but was not served with the lawsuit until January 15, 2014. The insured tendered the claim under its 2013 policy, but the insurer refused to defend it, purportedly because the insured did not have knowledge of the claim until after the expiration of the policy period. But the court rejected this argument, holding that under “the unambiguous definition of ‘claim,’ . . . a claim was made against [the insured] during the policy period.”
Detailed discussion: HealthSmart Benefit Solutions, a healthcare benefit management company, purchased a claims-made professional liability policy issued by Flectat Limited covering the period December 31, 2012 to December 31, 2013. On December 18, 2013, Opelousas General Hospital Authority filed an amended complaint in active litigation, adding HealthSmart as a defendant. The Opelousas lawsuit was not served on HealthSmart until January 15, 2014. On January 23, HealthSmart notified Flectat of the lawsuit.
Flectat denied coverage based on the timing of the claim. HealthSmart then filed a declaratory judgment action in the U.S. District Court for the Western District of Louisiana, alleging breach of contract and implied covenant of good faith and fair dealing based on the failure to defend. Flectat filed a motion for summary judgment, arguing that no coverage existed under its policy because HealthSmart failed to satisfy two requirements of the policy: that a “Claim” must be first made against the insured within the policy period and that the Claim must be reported to Flectat within the policy period.
The policy defined “Claim” as “a written demand or service of civil proceedings by one or more claimants seeking any of the following: monetary damages, injunctive relief, retraction or correction, arbitration or mediation.” The “Notice of Claim” provision provided that, “as a condition precedent to Your right to indemnity under this Policy, You shall give Us written notice of any Claim made against You or any specific act, error or omission which is reasonably expected to give rise to a Claim, as soon as practicable but in any event the earlier of 30 days after You first receive notice of any Claim made against You or You first become aware of any specific act, error or omission which is reasonably expected to give rise to a Claim, or the end of the Policy Period.”
According to Flectat, even though HealthSmart was added as a defendant on December 12, 2013, HealthSmart had no knowledge of the Opelousas lawsuit until January 15, 2014, when it was served. Thus, Flectat argued, the claim was not made against HealthSmart until 15 days after the policy expired. Notice of the claim similarly was late—23 days after the policy expired—Flectat argued.
HealthSmart countered that, because the definition of “Claim” includes “a written demand,” the Claim occurred on December 18 when Opelousas amended its petition to add HealthSmart as a defendant. U.S. District Court Judge Richard T. Haik, Sr. agreed, and denied Flectat’s motion for summary judgment.
The definition of a Claim “does not include a requirement that such a ‘written demand’ be discovered by, received by, served upon or otherwise provided to the insured,” he wrote. “Rather, the definition acknowledges the distinction between the date a claim is made against the insured and the date the insurer receives written notice of the claim. Considering the unambiguous definition of ‘Claim,’ the Court finds that a claim was made against HealthSmart during the Policy period.”
Further, the court held, HealthSmart provided timely notice when it informed Flectat of the lawsuit on January 23. According to the court, this timing was compliant with the “as soon as practicable” language of the notice provision. The court rejected Flectat’s argument that the comma before the “or by the end of the Policy Period” applied only to the notice and awareness portion and did not extend the policy period.
“While the Court does not disagree with Flectat’s grammatical interpretation of the Notice provision, it does not conflict with HealthSmart’s assertion that the provision permitted HealthSmart’s notification on January 23, 2014, within 30 days after HealthSmart first received notice of the Claim,” Judge Haik wrote.
“Under Flectat’s analysis, if a written demand had been made during the Policy period and the insured first received notice of the Claim or was served with the Claim on December 31, the insured would be unable to notify Flectat in writing before the end of the Policy period and would be denied insurance coverage. The Court finds that Flectat’s strained construction of the Policy language would render the carefully worded and punctuated notice requirements moot and would produce absurd consequences.”
To read the opinion in HealthSmart Benefit Solutions, Inc. v. Principia Underwriting, click here.