The Federal Supreme Court recently rendered a rare judgment on the temporal scope of liability policies and the claims-made principle.
The case involved a law firm's professional indemnity (PI) insurance, which ran from July 1 1999 to November 30 2008. Attorney C qualified as an insured under this policy.
Pursuant to the applicable general conditions of insurance of the PI policy, the insurance applied to losses for which a claim was made against an insured person during the policy period. For these purposes, a claim would be deemed 'made' when:
- the insured was first informed by the damaged party, orally or in writing, that the claim under the PI policy would be made; or
- the insured gained knowledge of circumstances according to which it could be expected that such a claim would be made (claims-made trigger).
In this case, attorney C provided legal advice to a client regarding a contract between the client and her stepson, in which the client renounced her status as trustee and protector of a trust. When the stepson dissolved the trust and the underlying offshore structure after the death of his father, the tax authorities charged supplementary taxes. The stepson claimed 50% thereof from his stepmother, arguing that she had also taken advantage of the trust structure. In May 2002 the stepson brought an action against his stepmother to claim her share of the supplementary taxes. When the stepson's legal action was granted, the stepmother claimed damages from the law firm for wrongful advice because no full and final settlement clause had been inserted in the agreement, which would have protected her from her stepson's claim.
The law firm finally sued its PI insurer and claimed coverage for the defence costs that it had incurred to defend against the client's legal action for wrongful advice.
The Zurich Commercial Court dismissed the law firm's legal action, finding that the claim had not been made during the temporal validity of the PI policy. The court held that the second alternative of the claims-made trigger required that the insured have had indications which were so concrete that a future claim was sufficiently foreseeable. According to the court, this would particularly be the case where a damaged party requested a waiver from the insured to plead the statute of limitations regarding a potential liability claim. The court ruled that no such indications existed during the policy period in question. On the other hand, the law firm argued that the words 'to expect' in the second alternative of the claims-made trigger did not imply a high probability of future liability claims. Also, the claims-made clause required no action from the damaged party, such as the request of a waiver from the insured to plead the statute of limitations.
The Supreme Court found that a claim would be expected, in the sense of the second alternative of the claims-made trigger, when a breach of the professional duty of care became known which could cause a loss. Insurance cover is granted for third-party claims in damages against an insured person, which become objectively apparent during the policy period based on the respective circumstances and for which, given these circumstances, liability claims must therefore be expected.
Although only the making of a specific claim by the damaged party entitles the insured to obtain insurance benefits (the claims-made principle), such a claim is regularly derived from past behaviour. Therefore, in principle, the second alternative of the claims-made trigger would cover cases which might no longer be insured due to a change of insurer (Article 9 of the Insurance Contract Act).
According to the Supreme Court, the failure to discuss with the client the inclusion of a 'full and final settlement' clause in the agreement constituted a breach of the professional duty of care. This breach of the professional duty of care, which led to the client's legal action against the law firm, was apparent in light of the stepson's October 2001 letter and his legal action against the client in May 2002. Accordingly, it was objectively apparent to attorney C by May 2002, when the stepson claimed the client's share of supplementary taxes due to the missing 'full and final settlement' clause, that the client would claim damages from him or his law firm in case she lost the lawsuit. It followed that the claim was made during the policy period. Therefore, insurance coverage applied to the defence costs incurred by the law firm and the Supreme Court granted the law firm's appeal accordingly.
Although it may lead to a broader scope of covered claims, the Supreme Court's decision should be seen in a positive light, as it brings additional clarity to the interpretation of claims-made clauses in insurance policies.
For further information on this topic please contact Alexandra Bösch or Markus Dörig at BADERTSCHER Rechtsanwälte AG by telephone (+41 44 266 20 66) or email (firstname.lastname@example.org or email@example.com). The BADERTSCHER Rechtsanwälte AG website can be accessed at www.b-legal.ch.
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