Claims Made Policy Requires Prompt Reporting of Claim

Two Year Delay in Reporting Requires Finding of No Duty to Defend or Indemnify

Claims Made policies were created to protect insurers against the obligation to defend or indemnify an insured from stale losses. They also allow an insurer to close its books on an insured after a policy has expired without notices of loss and, for that reason, is much less expensive than an “occurrence” policy.

In Hartford Fire Insurance Company and Hartford Casualty Insurance Company v. Inetworks Services, LLC, Inetworks Group, Inc., David Samat, and The San Jose Group Co., Case No. 18-cv-07693, United States District Court For The Northern District Of Illinois Eastern Division (March 27, 2020) District Judge Mary M. Rowland was presented with an insurance coverage dispute between Hartford Fire Insurance Company (“Hartford Fire”) and Hartford Casualty Insurance Company (“Hartford Casualty”) (collectively, “Hartford”) on the one side, and Defendants iNetworks Services, LLC, iNetworks Group Inc., (collectively, “iNetwork”), David Smat, and the San Jose Group Company (“San Jose”) (collectively, “Defendants”) on the other. Hartford’s moved for summary judgment.

Hartford sued seeking a declaratory judgment that it had no duty to defend or indemnify the iNetwork Defendants and David Smat.

BACKGROUND

Underlying Litigation

Judge Rowland noted that Hartford Fire issued to iNetwork Services a Technology Liability Policy (“Technology Policy”) for the period of January 27, 2016 to January 27, 2017.

iNetworks provides data storage to its clients. In September 2014, San Jose contracted with iNetworks to store all of San Jose’s data on iNetworks’ servers. On April 1, 2016, the iNetworks server containing San Jose’s data was infected by a virus that destroyed all of San Jose’s data (the “Server Compromise”).  iNetworks and Smat were aware of the Server Compromise in April 2016. Between April 2016 and August 2016, San Jose and iNetworks exchanged emails about the Server Compromise, its causes, the impact it had on San Jose’s business, and potential settlement offers.

San Jose filed a lawsuit in 2018 against iNetworks in the Circuit Court of Cook County alleging one count of negligence. iNetworks did not inform Hartford Fire of the Server Compromise or the lawsuit until six months later, on July 15, 2018. At that time, iNetworks asked Hartford Fire for coverage under the Technology Policy. The Circuit Court of Cook County entered a default judgment against the iNetwork defendants for $10,518,379 on May 21, 2019. On June 14, 2019, Hartford filed a motion to intervene and vacate, which the Circuit Court of Cook County granted. San Jose’s lawsuit was dismissed on January 10, 2020 and is currently pending before an Illinois appellate court.

Relevant Policy Provisions

The Technology Policy includes a reporting requirement, which states in relevant part: “This is a claims first made policy… Your policy applies only to claims when: the glitch occurs on or after the Retroactive Date and before the end of the policy period, and the claim is first made against any of you during the policy period and you use your best efforts to report such claim to us in writing as soon as practicable in accordance with the terms of this policy.” (emphasis added”) This reporting requirement is described again in the “When We Insure” section.

In addition to a reporting requirement, the Technology Policy also has a notice condition, which states: “The named insured must notify us in writing as soon as practicable of a glitch or circumstance that may result in a claim under this policy.” If the insured becomes aware of a glitch during the policy period, it must provide written notice to Hartford “within the policy period of: a. the specific glitch, the date of the glitch and the name of the potential claimant; b. the damages which have or may result from the glitch; c. the circumstances by which you first became aware of the glitch.” This condition also states that “[i]f a claim is made against any of you, as soon as any specified insured knows of such a claim, you must… immediately send us copies of all demands, notices, summonses and legal papers…”

DISCUSSION

An insurance policy is to be construed as a whole, giving effect to every provision, if possible, because it must be assumed that every provision was intended to serve a purpose.

As a preliminary matter, both parties agree that the Server Compromise constitutes a “glitch” under the Technology Policy. For the sake of this motion, both parties agree that the emails between April 2016 and August 2016 constituted a “claim” by San Jose against iNetwork. The Parties accordingly agree that both the glitch and the claim occurred during the policy period of the Technology Policy. Finally, the Parties agree that Hartford Fire did not receive notice of the lawsuit or the glitch until July 15, 2018.

Judge Rowland concluded that the Technology Policy is clearly a claims-made policy, which provides the insureds with coverage for claims by third parties that are both made and reported during the applicable time period. In fact, the plain text of the Policy expressly identifies itself as a claims made policy at least twice.

Courts strictly construe notice requirements in claims-made policies and view notice requirements as valid conditions precedent. Since the reasonableness of notice to an insurer by an insured is a question of law the Illinois Supreme Court requires court to look to several factors in assessing whether an insured’s notice is reasonable, including:

  • the language of the policy’s notice provision;
  • the insured’s sophistication in the insurance matters;
  • the insured’s awareness of an event which may trigger insurance coverage;
  • the insured’s diligence in ascertaining whether the policy coverage is available; and
  • prejudice to the insurer.

The third factor clearly favors Hartford. iNetworks was aware of the Server Compromise in April 2016. It was also aware that the Server Compromise detrimentally impacted San Jose’s business operations, as San Jose and iNetworks exchanged emails on the subject for three months and  the delay in this case exceeded two years after the Server Compromise and claim, eighteen months after the expiration of the Technology Policy, and six months after the filing of the lawsuit. Judge Rowland concluded the record presents no justification for iNetworks’ delay.

Although “length of delay” is not dispositive the more than two year delay is not “within a reasonable time.” Because iNetworks failed to report the claim “as soon as practicable,” Hartford has no duty to defend or indemnify iNetworks for the claim. Therefore the Court granted Hartford’s motion for summary judgment.

ZALMA OPINION

Claims Made liability policies are treated differently than “occurrence” policies and do not require a finding of “prejudice” when the report of loss is delayed. Prejudice is presumed when the loss or claim is not reported during the pendency of the policy or within a limited time after the expiration of the policy. In this case the decision was easy for Judge Rowland, because the loss was more than two years before the report and more than six months after the expiration of the policy, had no choice but to grant the motion for summary judgment. The sloth expressed by iNetworks deprived it of any possibility of receiving defense or indemnity from Hartford.


© 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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