A federal district court in Maryland recently distinguished a claims made policy, which is triggered by a claim during the policy period, from a claims made and reported policy, which requires both a claim during the policy period and reporting of the claim to the insurer during the policy period (or by some specified date after the end of the policy period).

The Financial Industry Regulatory Authority ("FINRA") purchased two employment liability policies from AXIS covering the periods March 31, 2010, to March 31, 2011, and March 31, 2011 to March 31, 2012. The policies provided coverage where the "Claim" at issue "is first made against the insureds during the Policy Period . . . and reported in writing to the Insurer as soon as practicable . . . but in no event later than sixty (60) days after the expiration of the Policy Period . . ." A "Claim" was defined as "the receipt by any Insured of . . . a written demand against any Insured for monetary or non-monetary relief."

FINRA received notice in April 2011 that a former employee had filed a charge of discrimination with the Equal Employment Opportunity Commission, and provided notice of the charge to AXIS in August 2011. AXIS agreed to defend the claim under a reservation of rights. However, when the employee's claim later settled, AXIS denied coverage for the amount of the settlement.

Specifically, AXIS took the position that only the 2010-2011 policy was potentially implicated because the employee had made a "Claim," as defined by its policies, on February 3, 2011 – during the 2010-2011 policy period. According to AXIS, the claim was in the form of an email from the employee's attorney to FINRA's associate vice president and associate general counsel, which read:

Not to quibble, but just so that we are clear, I did not ask for 5 years of "severance pay." I said that [the employee] believed that FINRA's decision to terminate his employment was discriminatory, in that his age was a motivating factor. I added that [the employee] would settle that claim for a sum equal to 5 years' pay. You said that you could get him 12 months, but no more than that and that if [the employee] chose not to accept that, his last day would be March 31. [The employee] rejects your counter-offer.

AXIS argued that this email constituted a "written demand . . . for monetary relief" pursuant to the policy, which required FINRA to provide notice during the policy period or within 60 days thereafter. And because FINRA did not provide notice of the claim to AXIS until more than 60 days after the end of the 2010-2011 policy period, the 2010-2011 policy was never triggered. FINRA, on the other hand, characterized the e-mail as "merely a recounting of an oral conversation the day before," and not a written demand for monetary relief.

But the court agreed with AXIS, holding that "[a] reasonably prudent person could not read the policies and conclude . . . that the February 3, 2011 e-mail was anything other than a claim." Just because the employee initially made an oral demand did not make the subsequent writing less of a written demand, the court opined.

It is clear that [the employee], through counsel, was asserting a legal claim for employment discrimination and demanding money in an amount equal to his salary for five years to settle that claim. . . . Any other reading of the e-mail is fanciful. The e-mail is a demand not for an amorphous "something due" but specifically for a monetary payment of a specifically requested amount. It is of no moment that the e-mail clarifies a prior oral demand, as it still states the demand, and it manifests the demand in written format.

FINRA's General Counsel's subjective belief that he was simply negotiating a severance agreement (and not a claim) demonstrated only that "he misunderstood the demand," the court held. The lack of formality in the e-mail was irrelevant because a demand was made – "a sum equal to five years' pay" – and the possibility of a lawsuit was clear.

In response, FINRA appealed to Maryland's notice-prejudice statute, contending that any delay in notice to AXIS was de minimis and did not prejudice the insurer. But the court rejected that argument, holding that the statute applies only to claims made policies, not claims made and reported policies. Indeed, the court held, claims made and reported policies require reporting during the policy period in order to be triggered, making the notice-prejudice irrelevant to those policies.

To read the decision in FINRA v. Axis Insurance Co., click here.

Why it matters: Understanding the difference between a claims made policy and a claims made and reported policy – and knowing which one you have – can be coverage-determinative, as the FINRA case demonstrates. Although notice-prejudice statutes and case law may be helpful in some circumstances, they do not apply uniformly from state to state, and therefore should not be relied upon as a substitute for strict compliance with the terms of the policy. Also, where policyholders have any doubts whether a third party demand constitutes a claim, they would be well advised to review the language of their policy carefully and any case law in their state interpreting similar language.