The First Circuit Court of Appeals recently issued an opinion that touched on several aspects of Maine law concerning claims-made insurance policies. Edwards v. Lexington Ins. Co., No. 07-1414 (1st Cir. Nov. 5, 2007).
In the underlying case, plaintiff Ernest Edwards and his wife brought suit in July 2004 against the manufacturer of an allegedly defective safety harness after Edwards fell some 17 feet from his hunting blind. Edwards was awarded a nearly $2 million default judgment when the defendant insured failed to appear in its own defense. Unable to execute on the judgment against the bankrupt insured, the Edwards brought suit against the defendant’s insurer under Maine’s reach-and-apply statute.
Before the trial court, the insurer moved for and was granted summary judgment as to each of the three policies it had issued to the insured on the following respective bases: (1) under a claims-made policy because the insurer had not received notice of any claim within the required notice period; (2) under an occurrence policy because the claim was excluded from coverage by an exclusion concerning injuries caused by safety belts and harnesses; and (3) under a third policy because notice was not timely made and because the defendant in the underlying lawsuit was not an insured. The plaintiffs appealed and the First Circuit affirmed.
On appeal, the plaintiffs argued that the insurer was estopped from denying coverage under the claims-made policy on notice grounds because it had allegedly breached its duty to defend its insured in the underlying action. The plaintiffs further argued that summary judgment was entered in error because the policy was ambiguous and unconscionable.
The First Circuit noted that it remains unclear whether Maine law permits third parties to assert an insurer’s failure to defend an insured. The court found resolution of the question unnecessary in the instant case, however, given that under Maine law an insurer that breaches a duty to defend is not estopped from later asserting a non-coverage defense, such as lack of timely notice. Since the insurer here was not estopped from asserting lack of timely notice, plaintiffs’ claims under the claims-made policy were properly dismissed on summary judgment. Furthermore, because the insurer never received timely notice of the petitioner’s claim, its duty to defend was never triggered in the first place and it was unnecessary to determine whether the underlying complaint implicated coverage under the policy under the “eight corners” rule.
As to ambiguity and unconscionability, plaintiffs argued that (1) the policy was ambiguous and unconscionable because it allegedly provided neither the retrospective benefits of a “standard” claims-made policy (coverage for incidents that occurred prior to the policy inception, but noticed during the policy period) nor the prospective benefits of a “standard” occurrence policy; and (2) the policy was unconscionable because the insurer allegedly received “an outrageously high premium” given an allegedly narrow scope of coverage. The First Circuit rejected both arguments, finding that an insurance policy is not rendered ambiguous or unconsionable merely because it differs from “standard” policies and declining the invitation to renegotiate premium terms reached between two sophisticated parties.