More Dangers Lurking in Claims-Made Policy Forms
Frederick Fisher | April 5, 2019
This article is the second in a series of three articles addressing the potential pitfalls embedded in claims-made coverage triggers. The final article in this series will examine three additional claims-made coverage trigger traps and explain how to avoid them.
If you haven't already, please check out the first three problems with claims-made forms as outlined in my article "Possible Dangers Lurking in Claims-Made Policy Forms." Then read on for more.
Problem #4: Other Hidden Dangers in the Definitions Section
In addition to the definition of "claim," other definitions in claims-made policy forms can also be problematic for insureds. A policy's definitions can be industry-or coverage-specific, and both types may create the possibility of a coverage gap.
Problematic definitions sections are not necessarily particular to claims-made policy forms. Yet, the definitions discussed in this article are a regular feature in employment practices liability insurance (EPLI) policy forms, virtually all of which are written with claims-made coverage triggers.
No doubt, we have become numb to the expectation that EPLI policies always provide third-party extensions (i.e., coverage for wrongful acts committed by employees against third-party nonemployees, such as customers, versus "traditional" employment practices liability [EPL] coverage for wrongful acts committed by employees against other employees). Yet, importantly, third-party coverage is not always automatically provided within an EPLI policy. Therefore, one must verify that a third-party extension is, in fact, included within an EPLI policy form and is part of the quote received from the underwriter.
A "Third-Party Wrongful Act" Definition Does Not Assure Coverage
When an EPLI policy contains a definition for "third-party wrongful act" within the definitions section of the policy, one may assume that third-party coverage is automatically provided. Unfortunately, sometimes—but not always—there is language elsewhere within the policy stating that third-party coverage is not provided unless the box next to "third-party liability" (often deemed Coverage B within an EPLI policy) is checked off on the declarations page. If the quote is silent as to third-party coverage, how would one know whether third-party coverage is part of the policy until the insurer sends the insured the actual, physical policy, which may be months after the policy's inception date?
The Emotional Distress Carve-Back: Another Problematic Definition
In addition, there are other dangers within the definitions section of EPLI policies that are equally subtle. A key question is whether there are separate definitions for an "employment practices wrongful act" and "third party wrongful act"? Since there usually are, one must coordinate the two definitions with the exclusions section of the policy. For example, the bodily injury exclusion usually contains a carve-back for emotional distress that arises from an employment practices wrongful act. But, if there is a separate definition for a third-party wrongful act, one must ask whether the bodily injury exclusion carve-back also applies to that definition? Thus, coverage should also be provided for emotional distress that arises out of the third-party wrongful act (e.g., a customer who is discriminated against by an employee and claims damages for both discrimination and for emotional distress). If not, a correcting endorsement will be required to make sure that the bodily injury carve-back applies to any third-party wrongful acts, in addition to a first-party employment practice wrongful act. This is illustrated in Figure 1.
FIGURE 1: EMOTIONAL DISTRESS CARVE-BACK WORDING NOT APPLYING TO THIRD-PARTY CLAIMS
The following Exclusions apply to this Coverage Section A: First-Party Employment Practices Liability…
E. Bodily Injury and Property Damage. The Insurer shall not be liable for Loss involving any Claim for
- bodily injury, sickness, disease, or death of any person; or
- damage to, destruction of, or loss of use of any tangible property;
except that Paragraph 1 of this Exclusion will not be applicable to First-Party Employment Practices Liability Claims for emotional distress, shock, humiliation, or mental anguish.
How Does the Policy Define "Third Party"?
Yet another problematic definitional issue within EPLI policy forms is the question of how the policy defines "third party." Is it "Any non-employee with whom the insured interacts," or is the definition limited to "current or former clients, or customers"? Obviously, it is best to have language that is as broad as possible, in which case "anyone with whom the insured interacts" is far superior to limiting coverage to only those claims made against the insured by "a current or former client or customer." This is illustrated by the wording in Figure 2 below.
FIGURE 2: RESTRICTIVE DEFINITION OF "THIRD-PARTY CLAIM"
Definitions Section-Third Party Claim
We consider it reasonable for you to foresee that a Claim may be brought against you if a current or former client or customer has expressed dissatisfaction. This includes, but is not limited to: A current or former client or customer making a complaint to a supervisory employee of Discrimination or Harassment by your Employee(s); or A current or former client or customer threatening to hire an attorney…."
Problem #5: "Time Bombs" and Traps in "Claim" Reporting Provisions
The claim reporting provisions within claims-made policies can also be problematic for an insured.
When Does the Automatic Extended Reporting Provision Apply?
Claims-made policies routinely contain automatic extended reporting provisions that allow insureds to report claims within 30 or 60 days following policy expiration. Yet, under some policies, the automatic extended reporting provision is available only in the event the policy is canceled or nonrenewed, but not if it is simply renewed; thus creating another "time bomb."
Claims Reporting Time Bombs
Another potential coverage gap inherent in claims-made policies is that many such forms contain what amounts to claims reporting "time bombs." That is, such policies require that claims be reported to the insurer within 30 days of the insured's receiving the claim. Thus, under a policy with a 1/1/20-21 term, a claim received on June 1, 2020, but not reported to the insurer until August 1, 2020, would not be covered. This is despite the fact that the claim was reported well before the policy expired.
In one instance, we have even seen language requiring that a claim be reported no later than 10 days after the insured has received it! The worse yet is that insureds (or their insurance brokers) may not expect to find a claims reporting "time bomb" provision in the conditions section of the policy, and yet, such "time bomb" restrictions are sometimes placed there rather than in the policy's claim reporting section.
Harsh as they may appear, these restrictions can nevertheless be legally enforceable. This is because various courts have interpreted such wording to be "clear and unambiguous." In effect, policies containing reporting restrictions of this nature are no longer "claims-made-and-reported" policies. Rather, this language transforms them into "claims-made-and-reported in 10 days" policies! Such provisions are not only substandard and unusual, but they can also give rise to devastating consequences for any policyholder, notwithstanding the litigation that will thereafter arise.
Figure 3 offers an example of two such time bombs.
FIGURE 3: CLAIM REPORTING PROVISION CONTAINING A "TIME BOMB"
V. CONDITIONS
A. Reporting of Claims and Potential Claims:
"You must provide written notice to our Appointed Representatives within thirty (30) days, but in any case, no later than 10 days before the response date for the claim, expiration date of this Policy or any applicable ADDITIONAL REPORTING PERIOD, when any Insured receives a Claim or when any Insured first becomes aware of any Claim; and immediately forward to us every demand, notice, summons, legal papers and/or other process received by you or your representative thereafter"
Problem #6: "Time Bombs" in "Incident Reporting" Provisions
Anyone who has been involved with claims-made policy forms is well aware of the "Incident Reporting" provisions that exist in most, if not all, such policies. These are important provisions, in that, if an insured becomes aware of facts or circumstances that might give rise to a claim in the future, yet an actual claim has not yet been made when that policy expires, then any such "incident," if reported prior to policy expiration, will be considered a "claim" under the now-expired policy.
The Need To Provide Specific Information
"Incident reporting" provisions almost always also require that certain specific information relevant to the "incident" or "circumstance" be provided to the insurer. Such information generally includes (but is not limited to) the following.
- The date the wrongful act arose that could give rise to a future claim
- The persons involved
- The events giving rise to the anticipated claim
- The manner in which the insured became aware of the incident or circumstance
- The estimated damages associated with the incident or circumstance
By requiring such details, an insured is prevented from simply listing all of its transactions within the past year as potential claims.
"Laundry Listing" Incidents Will Not Be Considered "Claims"
Thus, an insurer would not accept as a potential claim from an accountant, a list of all the tax returns she filed on behalf of every one of her clients, within the 6-month period prior to the expiration of her accountants' professional liability policy. This approach, known as "laundry listing," which was prevalent in the 1970s and 1980s, was often abused by insureds, a situation to which insurers responded by requiring that insureds provide specific details about the incident. Accordingly, many insurers now require as many as five specific items that must be disclosed for them to qualify as an "incident" reported during the policy term and thus eligible for coverage in the event the incident matures into an actual claim. Figure 4 refers to one such provision.
FIGURE 4: REPRESENTATIVE INCIDENT REPORTING PROVISION
X. If during the policy period, any Insured becomes aware of any act or omission which may reasonably be expected to be the basis of a claim against any Insured, including but not limited to any notice, advice or threat, whether written or verbal, that any person or entity intends to hold the Insured responsible for any alleged act or omission and gives written notice to the Company with all available particulars, including:
- The specific act or omission;
- The dates and persons involved;
- The identity of anticipated or possible claimants;
- The circumstances by which the Insured first became aware of the possible claim; and
- Potential damages or injury,
then any claim that is subsequently made against the Insured arising out of such act or omission will be deemed to have been made on the date such written notice was received by the Company. Said documents and information should be mailed to the Company at the following address:
"Incident Reporting" and "Claim Reporting" Are Not Synonymous
Importantly, an incident report of a potential claim is different from reporting an actual claim. As noted above, it is best to have the insured obtain a policy that does include automatic extended reporting provisions of 30, 60, or even 90 days to report a claim after the policy expires, so long as a claim was first made during the policy term.
Yet, unlike a "claim reporting provision," an "incident reporting provision" commonly does not give the insured additional time after the expiration of the policy to report an incident. In fact, the vast majority of "incident reporting provisions" require that the incident be reported prior to policy expiration. This is a critical distinction and makes it incumbent upon the broker to verify that the insured understands the difference between reporting an incident during the policy term versus reporting a claim during the policy term or during any postpolicy reporting window.
Time Reporting Restrictions within "Incident Reporting" Provisions
Incident reporting provisions may also have a "time bomb" associated with them. As I stated, I consider time-reporting restrictions to be substandard language and highly restrictive. Nonetheless, I have seen one policy where the insured, like the "claim reporting provision," was required to report an "incident" within 30 days after learning of it. Thus, under a policy with a 1/1/20-21 term, if an insured first becomes aware of an "incident" on July 1, 2020, but does not report it to the insurer until September 1, 2020, coverage for the incident will not apply because it was not reported to the insurer within 30 days of the insured's becoming aware of it. This is despite the fact that the insured reported the "incident" well before the policy expired.
The figure below provides an example of such language. Notice that the provision also does not allow for incident reporting during an extended reporting period (i.e., the report must come "no later than the expiration date of this Policy").
FIGURE 5: INCIDENT REPORTING PROVISION CONTAINING A "TIME BOMB" RESTRICTION
You must provide written notice to our Appointed Representatives within thirty (30) days, but in any case, no later than the expiration date of this Policy when any of your Management or Supervisory Employees first become aware of a Potential Claim in which an Insured Event is committed or alleged to have been committed on or after the Retroactive Date, if any, and prior to the end the Policy Period that may subsequently give rise to a Claim. Any Claim subsequently made against any Insured arising from the Potential Claim reported to Underwriters during the Policy Period shall be deemed, for the purpose of this insurance, to have been first made and reported during the Policy Period.
Important Takeaways
This second article about claims-made coverage trigger minefields has addressed three additional, structural aspects of claims-made policies that could potentially give rise to coverage denials. Here are additional critical points to check within claims-made policies.
- EPLI policy definitions—First, make sure that a claims-made EPLI policy's covered acts definition, as well as covering first-party wrongful employment practices acts, also covers third-party employment practices acts. In addition, confirm that the policy's definition of "third-party employment practices wrongful act" also encompasses coverage for "emotional distress" (as does the policy's definition for "employment practices wrongful act." Lastly, verify that the EPLI policy's definition of "third party" uses the broad "any non-employee" wording versus the restrictive "current or former customers or clients" wording.
- "Claim" reporting provisions—First, recognize that some automatic extended claim reporting provisions, while they allow insureds to report claims 30 or 60 days after a policy is canceled or nonrenewed, may not allow the insured to do so if the policy is simply renewed. Also, be alert to the fact that some "claim" reporting provisions require the insured to report "claims" with a certain period of time (usually 30 to 60 days) after becoming aware of the claim. Such policies will exclude "claims" reported to the insurer outside such time frames—despite the fact that the claim was reported well before the policy expired.
- "Incident" reporting provisions—Confirm that your insureds understand that, with regard to the policy's "incident reporting" or "notice of potential claim" provision, the potential claim sometimes must be reported before the current policy term expires, not within 30 to 60 days following policy termination, as is the case with reporting an "actual" claim made against the insured (as is allowed with postpolicy reporting windows). Moreover, be cognizant of the fact that, while many "incident" reporting provisions require incidents to be reported prior to policy expiration, an incident reporting provision with a time limit, or "time bomb," would require the insured to report incidents within 30 (or perhaps only 10) days after becoming aware of the incident—despite the fact that the policy may still be months away from expiring!
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