The notice requirements of claims-made policies serve many of the same purposes as do the notice requirements of occurrence policies—for example, prompt notice allows an insurer to investigate a claim, participate in the defense (if appropriate) and effectuate an early settlement where warranted. In addition to these more universal notice issues, however, claims-made policies present unique notice requirements and considerations. The most fundamental distinction between claims-made and occurrence policies is the trigger of coverage—an occurrence policy is triggered by the happening of an event, whereas a claims-made policy is triggered by the making of a claim. This distinction reflects an effort by insurers to predict more accurately their liability by confining potentially covered risks to a specific period of time, thereby enabling insurers to extend coverage at a lower cost. Such predictability (with its attendant pricing benefits) is further enhanced by requiring that notice of the triggering event for coverage—that is, the claim—occur within a limited period of time as well.
Claims-made policies generally contain three important notice provisions that raise specific coverage issues unique to this policy format. The first notice provision to consider in a claims-made policy is what is sometimes referred to as the "prompt notice provision." This provision requires that the policyholder provide the insurer with prompt or timely notice of claim. It may state that the policyholder must provide notice of the claim "as soon as practicable"—or even "immediately"—after it is made. A second type of notice provision found in certain claims-made policies is sometimes called the "reported provision." This provision requires that notice of the claim be provided or reported to the carrier within a specified period. Depending on the particular policy, the specified period may be the same as the policy period—that is, the claims-made period—or slightly extended. Such provisions often state that the claim must be reported as soon as practicable and no later than 30 or 60 days after the expiration of the policy. The third type of notice provision allows (or may require) an insured to provide notice of facts and circumstances that may give rise to a claim (sometimes referred to as notice of a potential claim or notice of circumstances). By providing notice to the carrier of facts and circumstances that may give rise to a claim, the eventual claim may be deemed first made during that policy period regardless of when it ultimately is made.
Consideration of these notice provisions requires, first, a look at the key distinctions between claims-made and occurrence-based policies. Occurrence-based policies may cover injury or damage that takes place during the policy period regardless of the date that the claim is brought against the policyholder. As a result, a policy issued in 1960 may be called upon to provide coverage for a claim brought today. This is known as the "long tail" of coverage and prevents carriers from closing their books on a policy within any defined period of time. Claims-made policies were developed, in part, to respond to this situation and to close the gap between when the carrier prices a risk and when the carrier may incur an obligation to pay on that risk, potentially years later. Claims-made policies limit the covered risk to claims made during a defined period, based on events occurring during or before the policy period, allowing the carrier to predict more accurately its potential exposure and price policies accordingly. The insurer faces fewer uncertainties such as future inflation, increasing jury awards and unanticipated changes in the substantive law.
Virtually all claims-made policies include a prompt notice provision, requiring an insured to give notice of a claim "as soon as practicable." The reported provision, on the other hand, is found in policies known as "claims-made-and-reported policies." Claims-made-and-reported policies require not only that the claim be first made during the policy period but also that the claim be reported to the carrier during the policy period (or shortly thereafter). In contrast, other claims-made policies require that the insured give notice "as soon as practicable" but do not otherwise require that the notice be within the policy period or another specific time period.
Strict construction of notice provisions in both claims-made and claims-made-and-reported policies is crucial to effectuating the scope and purpose of these policies. To require the insurer to provide coverage for a claim not reported within the specified reporting period would extend coverage beyond that for which the insurer contracted to provide and for which the insured paid. An insurer should not be required to show prejudice in order to deny coverage for a claim not reported within the specific period because this would expand coverage beyond the limited universe of claims to which the policy responds. Courts in many jurisdictions recognize this fact and do not require a showing of prejudice to deny coverage under a claims-made-and-reported policy in which notice was not provided during the specified period. See, e.g., Esmailzadeh v. Johnson & Speakman, 869 F.2d 422, 425 (8th Cir. 1989); City of Harrisburg v. Int'l Surplus Lines Ins. Co., 596 F. Supp. 954, 961 (M.D. Pa. 1984), aff'd without op., 770 F.2d 1067 (3d Cir. 1985).
The prompt notice provision, even in a claims-made policy that is not claims-made-and-reported, also should be strictly enforced to effectuate the design of the policy. Both parties benefit when the insurer knows that its liability is restricted to claims filed within a certain period of time and when the insurer can price the product accordingly. Many courts have recognized the crucial purpose served by the prompt notice provision in claims-made policies and have strictly construed this provision. See, e.g., E. Tex. Med. Ctr. Reg'l Healthcare Sys. v. Lexington Ins. Co., No. 6:04-CV-165, 2007 WL 2048660, at *7-8 (E.D. Tex. July 12, 2007); Kavajecz v. Evanston Ins. Co., No. B158538, 2004 WL 759529, at *18-19 (Cal. Ct. App. Apr. 9, 2004); cf. 4th St. Investors LLC v. Dowdell, No. 06-536, 2008 WL 163052, at *9 (W.D. Pa. Jan. 15, 2008) (recognizing that "[t]he rule requiring strict compliance with the notice provisions of a claims-made policy is firmly rooted in the nature of the policy" and rejecting insured's argument that the notice provision of a claims-made policy requiring notice "as soon as practicable" be construed less strictly than that of a claims-made-and-reported policy).
Policyholders often argue, however, that the only purpose of an "as soon as practicable" requirement is to allow an insurer the opportunity to investigate a claim and that the requirement is irrelevant to the scope of coverage afforded. Policyholders also argue that an insurer must be required to show prejudice before denying coverage for breach of the "as soon as practicable" requirement of a claims-made policy. Some courts have endorsed this view and required insurers to show prejudice before denying coverage for an insured's failure to provide notice "as soon as practicable." See, e.g., Pension Trust Fund v. Fed. Ins. Co., 307 F.3d 944, 956-57 (9th Cir. 2002); Oakland-Alameda County Coliseum, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 480 F. Supp. 2d 1182, 1197 (N.D. Cal. 2007). This analysis, however, deprives the insurer of the ability to know its potential costs and liabilities within a short period of time after the expiration of the policy. In other words, the insurer could find itself in the same "long tail" situation that it would be in with respect to an occurrence policy—a situation that claims-made policies were designed to avoid.
Additionally, policyholders in several recent cases have argued that a "no-prejudice rule" should apply only in situations in which the untimely notice was provided after the expiration of the policy period. In other words, so long as notice was provided within the policy period—according to them—no harm, no foul. The United States Court of Appeals for the Fifth Circuit, interpreting Texas law, has rejected this argument on at least two occasions over the last several years. See, e.g., SingleEntry.com, Inc. v. St. Paul Fire & Marine Ins. Co., 117 F. App'x 933, 936 (5th Cir. 2004); Fed. Ins. Co. v. CompUSA, Inc., 319 F.3d 746, 754 (5th Cir. 2003). This past summer, however, in the case of XL Specialty Insurance Company v. Financial Industries Corp., 259 F. App'x 675 (5th Cir. 2007), the court certified this very question to the Texas Supreme Court. The insured provided notice of a lawsuit within the policy period of a claims-made policy, but not until seven months had passed after the lawsuit was filed. The parties agreed that notice was not provided as soon as practicable as required by the policy's prompt notice provision and that the insurer did not suffer any prejudice. The Texas Supreme Court's resolution of the issue presumably will settle the applicable law in Texas.
Claims-made policies generally also contain a notice of potential claim provision, which plays an important role in the continuity of coverage context. In this connection, if the policyholder switches carriers for the next policy period, it is possible that the next year's policy will include a prior knowledge provision that bars coverage for a claim if it is determined that the insured should have reasonably anticipated the claim before the inception of the new policy. Submitting notice of facts and circumstances may preserve the insured's rights under the expiring policy. In effect, such notice may bring a future claim into the current policy. Another potential benefit arises from notice of facts and circumstances that may give rise to a claim. Information as to such facts and circumstances may allow the insurer to take the potential claim out of the mix of possible risks for pricing purposes for new policies and place the risk in the expiring policy.
The coverage issue that often arises in this context is whether the notice of facts and circumstances provided prior to the expiration of the policy period is sufficiently detailed and predictive to reach the eventual claim. Many notice of potential claim provisions require the policyholder to specify the nature of the alleged wrongful acts, the nature of the alleged or potential damage, the identity of actual or potential claimants and the circumstances in which the insured first became aware of them—in other words, the "full particulars." See Douglas County Chamber of Commerce v. Philadelphia Indem. Ins. Co., 237 F. App'x 410, 414 (11th Cir. 2007); Chatz v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 372 B.R. 368, 372-73 (N.D. Ill. 2007). The sufficiency of notices of potential claims gave rise to many coverage disputes following the savings and loan crisis of the 1980s, when insured financial institutions provided generalized notice to insurers of their worsening financial condition but never identified what particular wrongdoing might have been at issue. Many courts, however, held that the notices provided were not sufficient and, as a result, the ensuing claims (often brought by the FDIC or other receivers against the financial institutions' former directors and officers) were not covered. See, e.g., FDIC v. Booth, 82 F.3d 670, 677-78 (5th Cir. 1996); FDIC v. St. Paul Fire & Marine Ins. Co., 993 F.2d 155, 159-60 (8th Cir. 1993).
Carriers and insureds also often dispute the adequacy of notice when an insured, at the end of the policy period, gives a "laundry list" of anything potentially bad happening at the time. Cont'l Ins. Co. v. Metro-Goldwyn-Mayer, Inc., 107 F.3d 1344, 1348 (9th Cir. 1997); Cont'l Ins. Co. v. Superior Court, 37 Cal. App. 4th 69, 76 (1995); U.S. Fire Ins. Co. v. Fleekop, 682 So.2d 620, 628 (Fla. Dist. Ct. App. 1996). These "laundry lists" should not suffice. A simple disclosure of events, without more, is not enough. Cf. Sigma Fin. Corp. v. Am. Int'l Specialty Lines Ins. Co., 200 F. Supp. 2d 710, 718 (E.D. Mich. 2002) ("[A]llowing coverage to be triggered by broadly phrased, innocuous, or non-specific statements would permit an unbargained-for expansion of the policy, undermining the key distinguishing characteristic of a claims made policy—reduced exposure for the insurer and lower premiums for the insured."). If an insured's notice does not appear to meet the specificity requirements, however, the insurer may wish to note this issue up front. Some courts have held that the failure to identify deficiencies in a notice letter constitutes a waiver of the right to challenge the adequacy of the notice. See, e.g., FDIC v. Interdonato, 988 F. Supp. 1, 10-11 (D.D.C. 1997); Fed. Sav. & Loan Ins. Corp. v. Burdette, 718 F. Supp. 649, 653-54 (E.D. Tenn. 1989).
Notice of potential claim provisions also present a related issue. A few policyholders have successfully argued that information provided in connection with a renewal application (whether in the application itself, in attached financial disclosures or in meetings with underwriters) constitutes sufficient notice of facts and circumstances to lock the eventual claim into the current policy period. See, e.g., United Ass'n Local No. 38 Pension Trust Fund v. Aetna Cas. & Sur. Co., 790 F.2d 1428, 1430 (9th Cir. 1986). Many courts, however, have rejected this argument and have enforced requirements in the policy that notice be sent to the claims department and satisfy other specific requirements regarding the form of notice. See, e.g., LaForge v. Am. Cas. Co. of Reading, Pa., 37 F.3d 580, 583-84 (10th Cir. 1994); Am. Cas. Co. of Reading, Pa. v. Continisio, 17 F.3d 62, 69 (3d Cir. 1994); cf. CompUSA, 319 F.3d at 753 (fact that underwriter read policyholder's quarterly report filed with the Securities and Exchange Commission, which contained a reference to the subject claim, did not suffice as notice).
Another issue related to notice of potential claims is whether an insured who has given such notice must provide additional notice to the insurer when the claim ultimately is made. Although the United States Court of Appeals for the Ninth Circuit has said no (see Metro-Goldwyn-Mayer, Inc., 107 F.3d at 1347), the better and more reasoned view is that providing notice of facts and circumstances does not obviate the need to provide prompt notice of the claim. In this connection, other courts have recognized that the notice of potential claim provision and the notice of claim provision are sequential, rather than alternative. See, e.g., Harbor Ins. Co. v. Cont'l Bank Corp., 922 F.2d 357, 369 (7th Cir. 1990); cf. E. Tex. Med. Cntr. Reg'l Healthcare Sys., 2007 WL 2048660, at *7-8 (an insured's compliance with notice of claim circumstances requirement does not excuse it from abiding by separate requirement to give prompt notice when claim ripens into a lawsuit). Moreover, if an insured were not required subsequently to give notice of the claim, the insurer could lose its ability (and, possibly, contractual rights) to participate in the defense and the settlement of the claim, as well as to set reserves and otherwise be involved in the claim early on. Also, as a practical matter, failure to require the insured to provide subsequent notice of the actual claim might impose on the insurer a constant monitoring responsibility to determine if a claim ultimately will materialize. It is far more reasonable to require the insured—who, in almost all instances, would be made aware of the claim before the insurer could discover the claim (if at all) on its own—to notify the insurer of the claim instead.
Claims-made policies thus present an assortment of unique notice issues arising from the same fundamental principle—an insurer must know of a claim (or potential claim) within a short period of time and in sufficient detail in order to "close its books" and effectuate the cost-reducing design of these policies.