The Southern District of New York recently made the importance of notice requirements in a claims-made policy abundantly clear.[1] Generally, there are two kinds of insurance policies: (1) claims-made; and (2) occurrence. The Florida Supreme Court defines an occurrence policy as “a policy in which coverage is effective if the negligent act or omission occurs within the policy period, regardless of the date of discovery or the date the claim is made or asserted.”[2] Conversely, its definition of a claims-made policy is a “policy wherein the coverage is effective if the negligent or omitted act is discovered and brought to the attention of the insurer within the policy term.”[3] The fundamental difference between the two forms of insurance is that under a claims-made policy, it does not matter when a negligent or omitted act actually took place. The important date is the date on which “a claim”[4] concerning the negligent or omitted act is made. The essence of a claims-made policy “is notice to the carrier within the policy period.”[5]
Two recent decisions out of the Southern District of New York[6] in a dispute between the University of Pittsburgh and two insurance carriers exemplify the importance of not only prompt reporting of “a claim” but the need to report the claim properly according to the terms of the insurance contract. The University of Pittsburgh had hired an architectural firm, Ballinger, as the designer and architect for the construction of a hall at the university. Shortly after construction began, issues arose with the design of the Project which caused substantial delays. Ballinger had a claims-made policy with Lexington Insurance Company (“Lexington”) which ran from February 1, 2011 through February 1, 2012. Upon the expiration of its policy with Lexington, Ballinger then switched its policy to Axis Insurance Company (“Axis”) and the policy was in effect from February 1, 2012 until February 1, 2013. At no time was it claimed that Ballinger’s insurance had lapsed. The question was whether Ballinger had properly complied with the notice requirements in each of its policies.
On January 31, 2012 (during the Lexington policy period), Ballinger submitted a Notice of Occurrence/Claim to Lexington. The Notice of Claim listed the location of the claim as “University of Pittsburgh Salk Hall, Pittsburgh PA and stated “Senior management has been advised by the University of Pittsburgh that this project is experiencing problems and delays in its early stages” and provided the date of notice as January 31, 2012.[7] In July 2016, a district court for the Southern District of New York was presented with the issue of whether the above-noted notice was sufficient notice pursuant to the policy between Lexington and Ballinger. The Court began its analysis by noting that the contract required, as a condition precedent to coverage, that any written notice of a claim contain: (1) the actual or alleged breach of duty of circumstance which was subject to the potential claim; (2) a description of the professional services rendered by the insured which could result in the claim; (3) the date of the conduct which could result in the claim; (4) a description of the injury or damage that could result in a claim; (5) the identity and address of any potential claimant; (6) the anticipated location of any potential claim; and (7) circumstances by which the insured first became aware of the potential claim.
If the Court determined that the notice was insufficient, then there would be no coverage under the Lexington policy because it expired on the day after the notice was made without a subsequent timely notice being made. The Court determined, on Lexington’s motion for summary judgment, that the notice had been insufficient. Specifically, the Court held that the notice was deficient because “[i]t does not, as required, provide any indication of the actual or alleged breach of any professional duty; it does not as required, provide a description of the Professional Services rendered which may result in a claim; and it does not, as required, provide a description of the injury or damage that has or may result in a claim.”[8]
After the Court granted Lexington’s motion for summary judgment, Axis moved for summary judgment claiming that, because Ballinger had knowledge of “a claim” before the inception of its policy, there was no coverage under its policy.[9] The Court noted that under Axis’ policy, coverage would not be afforded if a “principal of the insured had knowledge of any act, error, omission, situation or event that could reasonably be expected to result in a claim.” Axis thereupon provided evidence, including the notice of claim mentioned above, to prove that Ballinger’s principals had notice of a potential claim involving its work at the University of Pittsburgh prior to the policy’s inception on February 1, 2012. Ballinger argued that at the time it filed its notice with Lexington it did not have knowledge that a claim would be specifically directed towards Axis. The Court disagreed and reasoned that, under the plain language of the insurance contract, Ballinger did not have to be certain that a claim would be made against it. It only had to have a reasonable expectation, which the Court found when it sent out the notice to Lexington.
As a result of the Court’s rulings, although Ballinger did not have a lapse in insurance coverage, its notice of claim to its first carrier was deemed insufficient and its notice to its second carrier was deemed untimely. Ballinger, therefore, did not have any insurance coverage for the claims being made by the University of Pennsylvania. In order to avoid this potentially dangerous pitfall, the holder of a claims-made policy should review the policy to determine exactly what information must be contained in any notice to its carrier about any potential claim. Further, the holder of a claims-made policy must clearly understand how “a claim” is defined in a policy and properly report any “claim” immediately upon becoming aware of it. The failure to follow the requirements of a claims-made policy in regards to notice and timeliness could result in the potentially catastrophic consequence of a claim’s denial, leaving an individual or company without insurance coverage.
[1] Univ. of Pittsburgh v. Lexington Ins. Co., 2016 U.S. Dist. LEXIS 95355 (S.D.N.Y. 2016); 2016 U.S. Dist. LEXIS 170285 (S.D.N.Y. 2016).
[2] Gulf Ins. Co. v. Dolan, 433 So. 2d 512, 514 (Fla. 1983).
[3] Id.
[4] What does or does not qualify as “a claim” is generally described in the policy and the policy holder should be aware of how the term is defined in their policy.
[5] Id.
[6] See note 1, supra.
[7] Univ. of Pittsburgh, 2016 U.S. Dist. LEXIS 170285 *5.
[8] Id. * 8.
[9] Univ. of Pittsburgh v. Lexington Ins. Co., 2016 LEXIS 170285 (S.D.N.Y. 2016).
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