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A Day Late Will Leave You More Than A Dollar Short

By: Kurt W. Melchior
07/09/08

It's an old adage that you must promptly notify your insurance carrier when a "claim" arises, and a new California Court of Appeal decision underscores that sooner is definitely better than later. While this holds true for all policies, it is absolutely essential in connection with directors' and officers' liability, professional liability, employment practices liability, and any other "claims made and reported" policies. These policies cover only those "claims" made against the policyholder during the policy period (or within a short time period after expiration of the policy), without regard to when the liability-producing act occurred.

In Westrec Marina Management, Inc. v. Arrowood Indemnity Company, an employee filed a charge of discrimination with the Department of Fair Employment and Housing and requested an immediate right to sue letter, which the Department issued the next day. The employee's lawyer then wrote to Westrec, describing alleged incidents of discrimination and explaining that the employee had obtained a right to sue letter but might prefer "to resolve or mediate this matter" and "to promptly rectify the harm" instead of incurring the expense of litigation. Six months later, the employee filed suit.

Six weeks after the suit was filed, the company first notified its insurance carrier of the situation, requesting defense and indemnity under two successive directors' and officers' liability policies. The insurance carrier denied coverage, arguing that both the DFEH charge and the demand letter were "claims" under the policies and that Westrec's failure to tender them to the insurer rendered its later tender of the lawsuit untimely. The Court of Appeal agreed.

The Court explained that the insuring clause of the policies stated that the insurer would provide coverage only for claims "first made … and reported" in the manner required by other policy terms. Another provision stated that a claim must be "first made" during the policy period and reported within 30 days after expiration of the policy. Terms of this nature are standard provisions in "claims made" policies. The Court held that while "the references to claims "first made … suggest that the same claim can be made more than once," the policies covered only claims first made and reported within the specified time periods.

The Clark lawsuit and the Adams letter constituted a single claim that was first made at the time of the Adams letter. Westrec received the Adams letter during the first policy period but failed to notify Arrowwood of the claim within 30 days after the expiration of the policy, as required. Westrec's subsequent notice of the lawsuit during the second policy period concerned the same claim and therefore was untimely.

Westrec is not entitled to coverage under the policies because it failed to timely report the claim.

The lesson to be learned from Westrec is that procrastination in the insurance context can cost you dearly. When your company receives some form of approach that can be viewed as a demand, report it to your insurance company immediately.

As this case shows, failure to report promptly is almost always fatal to obtaining coverage under "claims made" or "claims made and reported" policies. The law is more generous for what are called "occurrence" policies but any kind of demand or claim calls for prompt professional analysis of the communication and for tender if the policy so requires.

This is the second in a series of occasional reports about general principles relating to buying, owning, and dealing with insurance policies.

Kurt W. Melchior chairs the Firm's insurance coverage practice group and has over 50 years' experience litigating complex commercial matters, including class actions, antitrust, insurance coverage, health care, and professional responsibility cases. He can be reached at 415.438.7279 or kmelchior@nossaman.com.

Thomas D. Long focuses his practice on complex commercial disputes. He counsels private businesses and public entities on insurance issues and also represents them in coverage litigation under all types of insurance policies, including commercial general liability, property, employment practices liability, directors' and officers' and professional liability policies. He can be reached at 213.612.7871 or tlong@nossaman.com.

Deborah E. Beck focuses her practice on appellate, environmental, and insurance coverage issues. She counsels private businesses and public entities on insurance issues and also represents them in complex coverage litigation under all types of insurance policies, including commercial general liability, property, employment practices liability, directors' and officers' and professional liability policies. She can be reached at 415.438.7254 or dbeck@nossaman.com.

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