Wisconsin Supreme Court gives Wisconsin policyholders no margin for error when giving notice under claims-made-and-reported liability insurance policies.

Anderson v. Aul, 2015 WI 19 (February 25, 2015)

All insurance policies require timely notice of claims. Such provisions serve an important purpose in allowing an insurer to investigate the insured claim. An age old question in insurance cases is what happens if notice is not timely given. Does the insured lose coverage or must the insurer demonstrate prejudice? Wisconsin seemingly answers this question by statute, which says that coverage for late notice is lost only if the insurer is prejudiced by the untimely notice. This had always been accepted with occurrence policies—but it had never been considered with so-called "claims-made-and-reported policies." Unlike the traditional "occurrence" based policies, "claims-made" policies apply where the insured receives a "claim." This means that once the policy period expires the insurer’s obligation is at an end. Most claims-made policies also require the insured to give notice during the policy period as well, and an open question in Wisconsin is whether Wisconsin's rules on late notice applied with equal force to claims-made-and-reported policies.

Last week the Wisconsin Supreme Court addressed this issue and declared that the answer is no. In Anderson v. Aul, a case in which Quarles & Brady participated on behalf of the plaintiffs seeking coverage, the court denied coverage to an attorney (and by extension, denied relief to the plaintiffs who had sued him) because the attorney had not given timely notice even though it was conceded that the insurer had not been prejudiced in its ability to investigate or defend the claim. With this decision, a late reported claim will not be covered even if the insurer suffered no prejudice due to the late notice. Ultimately, an insured’s untimely notice of a claim under a claims-made-and-reported policy, even by a single day, can defeat coverage.

The facts in Anderson may make the holding a little more understandable. Anderson was originally an attorney malpractice case. The plaintiffs wrote a letter to the attorney policyholder in December 2009 claiming malpractice and demanding money. The attorney’s professional liability policy covered claims that were both made and reported to the insurer between April 2009 and April 2010, but the attorney did not provide notice until March 2011, eleven months after the policy expired. The plaintiffs filed suit a year later—well after the insurer had notice of the claim. The insurer intervened in the lawsuit, seeking a declaration that it owed no coverage based on the attorney policyholder's failure to provide notice of the claim within the reporting period. The trial court ruled in the insurer's favor despite acknowledging that the insurer likely suffered no prejudice.

In early 2014, the Wisconsin Court of Appeals reviewing the Andersoncase held that Wisconsin’s notice-prejudice statutes apply to claims-made-and-reported policies. The Court of Appeals further decided that the insurer suffered no prejudice from the delayed notice. The court found that the insurer had adequate time to investigate and defend the claim, reasoning that even though notice was late per the policy terms, it came well before formal discovery or any court-ordered deadlines.

The Wisconsin Supreme Court’s majority opinion turned largely on issues of statutory construction, holding that the plain language of the notice-prejudice statutes, sec. 631.81 and 632.26, Wis. Stats., did not apply to the reporting requirement in “claims-made-and-reported” policies. The majority decision drew a fine distinction between the insured "giving notice" of a claim and the insured’s act of "reporting" a claim to an insurer under a policy that "covers" only claims that are timely reported. In other words, because the reporting requirement was in the coverage grant, the court reasoned that the statute did not apply as it would create new coverage where no coverage existed in the first place.

The Anderson court seemed to make some effort to narrow the scope of its ruling, differentiating between “occurrence” “pure claims-made” (where only the claim, not the reporting, needs to occur during the policy period) and “claims-made-and-reported” policies, the latter being the only type of liability policy outside the scope of Wisconsin’s notice-prejudice statutes, sec. 631.81(1) and 632.26(2), Wis. Stats. The court also left open the possibility that a late reported claim under a claims-made-and-reported policy may be covered if reporting were impossible.

There is no getting around the fact that this decision is a tough one to swallow for the myriad of Wisconsin businesses that purchase these types of policies, which are ubiquitous in employment practices liability, errors and omissions and directors and officers liability policies. Barring reconsideration, going forward, Wisconsin policyholders with claims-made-and-reported policies should bear in mind three key points:

(1) always read and understand whether you have a claims-made-and-reported liability policy; (2) be vigilant about what constitutes a “claim” under the policy – a claim can be broader than suit papers and as simple as a letter demanding some relief or payment, or even a government subpoena or investigation;

(3) when faced with an arguable claim or circumstances that could turn into a claim, err on the side of caution and report the claim or circumstances to the insurer.