When an occurrence policy expires, the premiums stop but the coverage continues. A claims-made policy covers claims that occur, are made against you and which are reported during the policy period. The incident must take place after you purchase coverage.
The Ontario Superior Court in Kestenberg Siegal Lipkus v Royal & Sun Alliance Ins. Co. ("Kestenberg") addressed a coverage dispute where an insured failed to properly inform their insurer of a claim due to their broker's negligence. Because the insured had a "claims made and reported" policy, the case highlights how strictly the Courts construe such policies.
The insured law firm was sued for negligence and had reported the claim to its insurance broker. The broker promptly reported the claim to the primary professional liability insurer, but did not report it under a second excess policy, which had been issued by Royal & Sun Alliance Insurance Company of Canada ("RSA"), until at least three years later. The broker, HUB International HKMB Limited ("HUB"), entered into an agreement with the law firm which allowed the broker to sue the excess insurers in the law firm's name.
The RSA policy was a "claims made and reported" policy, such that it only covers claims that are first made and reported to the insurer during the policy period. In addition to the condition requiring the insured to provide written notice of any claim as soon as practicable, a policy "Condition" read as follows:
This policy only covers claims first made against the Insured and reported to the Insurer during the policy period and provided that such claim arises out of an act, error or omission committed or alleged to have been committed on or after the retroactive date set forth at Item. 6 of the Declarations.
Such requirement of notice within the term of the policy is what's known as a condition precedent to coverage for the claim.
The record establishes that the insured asked HUB to report the claim to the first excess insurer and to RSA in 2018. The broker promptly reported the claim to the first excess insurer but failed to report the claim to RSA, the second excess insurer, until 2021. By that time, the policy period had expired.
The insured argued that there was a gap in the evidence suggesting RSA may not have suffered any prejudice because they knew about the claim even though they did not receive proper notice of it. The insured also argued that the entire rationale for insurance is coverage, and that as a matter of public policy coverage must be interpreted generously.
While this rationale may be laudable, the Court held that ".... [i]n the long run, a contextual but unprincipled approach would render a disservice not only to the industry, but also to insured and to victims. It would lead to further difficulties in obtaining coverage and compensation." Both parties to an insurance contract are entitled to expect that well-established principles will be reflected in the interpretation and application of the insurance contract. Nor was RSA required to negative the argument that it had not suffered prejudice because there was no evidence that it knew of the claim.
As a final argument to acquire coverage, statutory relief from forfeiture provisions were invoked. These provisions allow Courts to grant coverage in order to avoid harsh and inequitable results (and despite some breach of the policy provisions). But the Court found the insured could have protected itself in from losing coverage a number of ways, such as buying an extended reporting endorsement. The fact that it chose not to is "hardly reason to twist the plain wording of the coverage clause and thereby create an ambiguity where none exists." In the result, the Court declined to grant relief from forfeiture.
Takeaway
Coverage in claims-made policies will be scrutinized in the broader context of such policies, namely, restricted coverage by the insurer in exchange for a lower premium paid by the insured. This perhaps harsh outcome of late reporting is thereby supposedly justified.
The result in Kestenberg is under appeal.
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