FEATURED ARTICLE

Potential Claims: To Report Or Not To Report? (Part II of II)

Reprinted with permission. Originally published in the PLUS Journal - September 2011 - Issue XXIV, Volume 9

By Michael R Sarner. Michael Sarner is an attorney and Senior Vice President with Hays Companies

(You may obtain Part I in our archived emails at www.dhia.com)

The Prior Notice Exclusion

Many claims made insurance policies include a "prior notice exclusion." The prior notice exclusion will generally exclude claims based upon any fact or circumstance which was the subject of any notice of claim or potential claim given by the Insured under a prior insurance policy. Under certain policies, the exclusion is limited to notice under prior similar policies or those of which the policy in question is a renewal or replacement. The intent of the exclusion is that if a Claim or Potential Claim has been noticed under a prior insurance policy, that Claim will be excluded under the current policy. Notable for the purposes of this article, the prior notice exclusion is triggered simply because that Claim or Potential Claim was reported under a prior policy, and is not in any way contingent on whether that prior policy has or will provide any coverage. The enforceability of the prior notice exclusion has been upheld by several courts.

In LaValley v. Virginia Surety Co., Inc., 85 F.Supp.2d 740 (N.D. Ohio 2000), the Northern District of Ohio (relying largely on an unpublished case from the Southern District of New York called Zunenshine et. al. v. Executive Risk Indem., Inc., (S.D.N.Y. 1998)) held that a prior notice exclusion in a D&O insurance policy was enforceable. The Court stated that not only was the prior notice exclusion unambiguous, but that to afford coverage in abrogation of the prior notice exclusion would give the insureds more than they paid for and run contrary to the purpose of claims made policies, which is to limit the insurer's liability to a fixed period of time.

In United Investors Realty Trust v. Hartford Specialty Co., 2003 WL 22350647 (N.D. Tex. 2003), the D&O policy in question stated coverage was excluded for "any Claim, Wrongful Act or circumstance if notice is given under any directors and officers liability, general partners liability or equivalent policy, the term of which incepted prior to the Inception Date of this Policy." The Insured had previously reported a Claim to an Insurer who became financially distressed and was unable to pay Claims. The Insured argued that their reporting of the Claim did not constitute notice "under" the prior policy because notice must be given as provided under the policy in a manner capable of effecting coverage under the policy. The Court analyzed the word "under" in the policy, and found that it should receive its plain and ordinary meaning of "in accordance with." Using that construction, the Court held that notice had indeed been given in accordance with the prior policy, and thus the prior notice exclusion was enforceable.

Considerations Prior to Reporting a Potential Claim

While reporting Potential Claims can certainly be beneficial, an Insured should carefully weigh the risks before doing so. Where notice of a Potential Claim is not accepted, and then future policies deny coverage based on the prior notice exclusion, the insured is then faced with the worst possible scenario of having no opportunity for coverage for the Claim under any policy. In that case, the Insured would obviously have been better off not reporting the Potential Claim at all. 

To that end, prior to reporting a Potential Claim, there are a number of specific factors to consider which can materially increase or decrease the associated risks.

• Understand the degree of specificity necessary to report a Potential Claim.  As previously noted, many insurance policies affirmatively state the details which must be included in any notice of Potential Claim (facts, names, dates, etc.). Make a determination as to the likelihood that the Potential Claim is developed enough to satisfy the required specificity of the relevant insurance policy. If there is uncertainty as to whether the current situation allows the insured to provide that required specificity, consideration should be given to allowing the Potential Claim to further develop prior to reporting.
• The actual language of any potentially applicable prior notice exclusion. Certain insurers will amend their prior notice exclusion to only exclude claims noticed "and accepted" by previous insurers. Thus, if an insurer had previously denied acceptance of a Potential Claim for lack of specificity, such notice would not trigger the prior notice exclusion because the notice was never accepted by a previous insurer. If the prior notice exclusion can be amended in such fashion, the potential downside of reporting a Potential Claim is significantly mitigated. As such, as a matter of course it is recommended that Insureds attempt to modify any prior notice exclusion to require that the prior notice have been "accepted" in order to trigger the exclusion. 
•  Whether the policy in question is approaching expiration. If the insurance policy in question is approaching expiration, there is limited time in which the insured can report a Potential Claim under that particular policy so a decision must be made in short order. However, if there is ample time left in the policy period, because there is generally no requirement to report a Potential Claim in a timely fashion, the Insured can typically afford to allow the Potential Claim to further develop prior to reporting.  
• The limits of liability remaining under the current policy. If the limits under the current policy are eroded, prior to reporting a Potential Claim, the Insured should consider whether it will have adequate limits available should the current Potential Claim evolve into a Claim. This analysis will be largely dependent on both the extent to which the current policy is or may become eroded, as well as the anticipated loss related to the Potential Claim.

In summary, an insured must carefully consider the future coverage implications before reporting a Potential Claim under a claims made insurance policy. While there can be great benefit in taking advantage of the efficiencies associated with reporting a Potential Claim, if there is doubt as to whether such notice will contain the level of specificity required by the relevant insurance policy, an analysis of the potential risks should be undertaken prior to reporting that Potential Claim to an insurer.

 ____________________________

[1] The capitalized terms in this article are typically defined terms under claims made insurance policies. It should be noted that these definitions, along with many other terms and conditions of claims made policies, can vary depending on the specific insurer's form and the negotiated amendments to that form.

[2] Many claims made policies require the insured to provide notice of a Claim "as soon as practicable."

[3] While many claims made policies will require that a Potential Claim be reported with a certain degree of specificity, the required specificity and the policy language can vary widely from insurer to insurer.