Why it matters: Claims-made-and-reported policies require that the claim be both made against the insured and reported to the insurer within the policy period. A recent California decision confirmed that where these two conditions are not met, the equitable excuse rule (developed by a California state court) would apply only in narrow circumstances not present in the instant dispute. Here, a lawyer missed several deadlines after filing a civil rights lawsuit and the case was dismissed. After the Ninth Circuit Court of Appeals affirmed dismissal, the client filed a malpractice suit against the lawyer resulting in a default judgment. The client later attempted to enforce the default judgment against the malpractice insurer, which objected arguing that the claim had been neither made against the insured attorney nor reported to the insurer during the policy period. A California federal court sided with the carrier and rejected attempts to squeeze the case within the equitable excuse rule.

Detailed discussion: Mercury Marilla retained B. Kwaku Duren to file a civil rights lawsuit in May 2009. The next month, Duren took out a legal malpractice policy from Arch Insurance Company (AIC) with coverage from May 20, 2009, through May 20, 2010, insuring him for up to $300,000.

The policy stated: "This is a claims-made and reported policy. … The policy is limited to liability for only those claims that are first made against the insured and reported to the company during the policy period unless and to the extent that an extended reporting period option applies."

Duren missed several deadlines with regard to Marilla's lawsuit, and a federal court judge dismissed the complaint in November 2009. The Ninth Circuit Court of Appeals affirmed the dismissal in January 2012.

A few months later, Marilla filed a legal malpractice suit against Duren in California state court. The lawyer failed to respond and a default judgment of $250,480 was entered against him in January 2014. Marilla later learned about Duren's policy with AIC and assigned his rights to the default judgment to a third party, Michael Petersen.

Petersen filed a claim with AIC but the insurer rejected it; Petersen then filed suit in California federal court alleging breach of contract.

Considering AIC's motion to dismiss, U.S. District Court Judge Otis D. Wright II noted the parties did not dispute that the policy was a claims-made-and-reported malpractice insurance policy and that no malpractice claims were asserted against Duren or reported to AIC during the coverage period.

Despite this, Petersen told the court that he should be equitably excused from making a timely claim, that a claim filed timely would have constituted "an idle act," and that the policy terms were unconscionable as applied to him. The court rejected each of the plaintiff's arguments.

Marilla (or Petersen) had no knowledge of the insurance policy, the plaintiff contended, which made it impossible to make a claim with AIC and report it during the coverage period. But lack of knowledge about the policy "was not an actual or legal barrier to filing a suit," Judge Wright wrote, and Marilla "could have sued Duren whether he knew about the policy or not. It was not 'impossible' for Marilla to satisfy at least the claims-made requirement under the Policy." Petersen's lack of knowledge was "utterly irrelevant" as a third-party assignee of the default judgment that did not obtain any legal rights until the assignment, the court added.

The court distinguished a case that equitably excused the making of a timely claim (Root v. American Equity Specialty Ins. Co., 130 Cal. App. 4th 926 (2005)) based on the facts. In Root, an attorney was sued just three days before his policy expired and when the attorney learned about the complaint two days after the expiration, he immediately reported it to his insurer.

"The facts of this case are a far departure from Root and do not warrant the application of the equitable excuse rule," Judge Wright said. "Marilla's malpractice lawsuit was filed two years after the coverage period terminated, and it was reported to [Arch] four years after the coverage period terminated. … While the relevant delays in Root were measured in hours, the delays in this case are measured in years. Thus, equity does not require the Court to excuse both the claim and reporting requirements in the Policy."

Filing the malpractice suit prior to the Ninth Circuit's affirmation of the civil rights lawsuit dismissal did not constitute an "idle act," the court said. Although Petersen argued that his suit would have lacked ripeness prior to the federal appellate court's order, the court said Duren's malpractice was "complete and final" when he missed the deadline to file an opposition to a motion to dismiss the civil rights lawsuit.

"While the appeal could have reopened Marilla's case, and thus limited the malpractice damages, it could not reverse Duren's breach of duty to his client," the judge wrote. "Marilla was not prohibited under any law from sending Duren a letter demanding compensation for his failure to adequately perform—a 'claim'—in the fall and winter of 2009. There was also nothing prohibiting him from bringing a lawsuit. There is no allegation that Marilla made any type of claim during the coverage period. The insurable event under the Policy was the assertion of a claim during the policy period and no such claim was made."

Petersen's final argument—that the policy's claims-made-and-reported provisions were unconscionable as applied to him, a third-party beneficiary—also failed to sway the court. "Petersen's role in this case is limited," Judge Wright wrote. "He was assigned Marilla's rights under the default judgment and not the Policy. Petersen was, and remains, a complete stranger to the contract entered into between AIC and Duren. As such, AIC owes no obligation to Petersen."

The plaintiff did not explain how AIC was supposed to notify him of the policy terms back in 2009, the court said, particularly as the insurer first learned of the assignment in 2014.

"The Court is sympathetic to Marilla's inability to recover for the harm he suffered," the court noted. "Duren's alleged conduct is abhorrent, at a minimum. However, recovering from AIC is not possible under the law."

To read the order in Petersen v. Arch Insurance Company, click here.