Claims Made Policies

Most people in Grand Prairie, Arlington, Dallas, Fort Worth, Mansfield, Cedar Hill, De Soto, Duncanville, Lancaster, Weatherford, Aledo, Azle, Hudson Oaks, or any other place in Texas would not know the difference between a “claims-made” insurance policy and any other type of insurance policy.
The Texas Supreme Court decided a case in March of 2009, that discussed one of the distinctions in a “claims-made” policy. The case is styled, Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Company, et al.
This case is a declaratory judgment action. Agricultural Excess & Surplus Insurance Company (AESIC) brought this action asking the court to declare that they have no obligations in this case to defend or indemnify in the lawsuit brought against Prodigy Communications Corp (Prodigy).
The court had to decide whether a notice-prejudice rule applies to a claims-made policy when the notice provision requires that the insured, “as a condition precedent” to its rights under the policy, give notice of a claim to its insurer “as soon as practicable …, but in no event later than ninety (90) days after the expiration of the Policy Period or Discovery Period.” The parties dispute whether notice of the claim was given “as soon as practicable” but agree that the insured gave notice within the ninety-day cutoff period. AESIC admits that it is not prejudiced by the delayed notice.
For the reasons explained below, the court concluded that “notice as soon as practicable” was not an essential part of the bargained for exchange under the claims-made policy at issue. The court held that “in the absence of prejudice to the insurer, the insured’s alleged failure to comply with the provision does not defeat coverage.”
Some facts are:
Prodigy had a claims-made “Directors’ and Officers’ Liability Insurance Policy Including Company Reimbursement” issued by AESIC. The policy covered March 16, 2000 to May 31, 2000 and another til May 31, 2003.
The policy contained the following amended “notice of claim” provision:
The [Insureds] shall, as a condition precedent to their rights under this Policy, give the Insurer notice, in writing, as soon as practicable of any Claim first made against the [Insureds] during the Policy Period, or Discovery Period (if applicable), but in no event later than ninety (90) days after the expiration of the Policy Period, or Discovery Period, and shall give the Insurer such information and cooperation as it may reasonably require.
Prodigy became aware of a lawsuit involving them on June 20, 2002 and first notified AESIC in a letter dated June 6, 2003.
By letter dated June 18, 2003, AESIC denied coverage on the ground that the June 6 letter did not comply with the policy’s notice requirements.
In an earlier case, this court had ruled that “an immaterial breach does not deprive the insurer of the benefit of the bargain and thus cannot relieve the insurer of the contractual coverage obligation.
The AESIC policy states unambiguously that the insured’s duty to give “notice, in writing, as soon as practicable” is a “condition precedent” to coverage.
AESIC argued, timely notice is always inherent to, and an essential part of, the bargained for exchange in a claims-made policy.
The court in its analysis said that to determine whether “notice as soon as practicable” is an essential part of the bargained for exchange in the claims-made policy at issue, it is helpful to review the basic distinctions between occurrence and claims-made policies and the different types of notice requirements associated with each.
One treatise of law was quoted that said:
D & O insurance policies today are invariably written on a “claims-made” basis, which means that the policy only covers those claims first asserted against the insured during the policy period. This limitation appears in the insuring clauses. This coverage differs from “occurrence” type coverage, written for most casualty insurance, which covers only claims arising out of occurrences happening within the policy period, regardless of when the claim is made. Thus, the main difference between these two types of policies is that a “claims-made” policy provides unlimited retroactive coverage and no prospective coverage, while an “occurrence” policy provides unlimited prospective coverage and no retroactive coverage.
The court went into a many paged discussion regarding these different policies then concluded:
In a claims-made policy, when an insured gives notice of a claim within the policy period or other specified reporting period, the insurer must show that the insured’s noncompliance with the policy’s “as soon as practicable” notice provision prejudiced the insurer before it may deny coverage. Here, it is undisputed that Prodigy gave notice of the lawsuit before the ninety day cutoff. Even assuming that Prodigy did not give notice “as soon as practicable,” AESIC was not denied the benefit of the claims-made nature of its policy as it could not “close its books” on the policy until ninety days after the discovery period expired.
The court then ruled, stating:
Accordingly, we conclude that Prodigy’s obligation to provide AESIC with notice of a claim “as soon as practicable” was not a material part of the bargained for exchange under this claims-made policy. As AESIC has admitted that it was not prejudiced by the delay in receiving notice, it could not deny coverage based on Prodigy’s alleged failure to provide notice “as soon as practicable.”
As always, when these situations arise it is vital to seek the advice of an experienced Insurance Law Attorney as soon as possible.