Claims Made & Reported Policy Conditions Must Be Fulfilled

It Takes Skill or Stupidity For An Insured to Violate the Reporting Condition of Two Policies

Insurers who write claims made and reported errors and omissions insurers are entitled to honest, prompt and accurate reports of potential claims that occur during the policy term or that occurred before the effective date of the policy. It takes a seriously incompetent insured to fail to report promptly a known claim to one insurer and failed to advise the subsequent insurer of the existence of the potential claim. In University of Pittsburgh v. Lexington Insurance Company, Slip Copy, United States District Court, S.D. New York, 2016 WL 7174667 (12/8/16) the USDC was asked to make one of the insurers pay for a loss only to find neither insurer was obligated to pay.

ISSUES

In an insurance-coverage action between the University of Pittsburgh (“Pitt”) as plaintiff and two insurance carriers, Lexington Insurance Company (“Lexington”) and Axis Insurance Company (“AXIS”). The dispute arose from problems encountered during a construction project at Pitt’s Salk Hall (the “Salk Hall Project”), for which the university had engaged Ballinger as its designer and architect. When these problems resulted in a claim against Ballinger by Pitt.  Ballinger attempted to invoke its professional-liability insurance coverage under policies it held with Lexington and AXIS. Both insurers denied coverage. Ballinger sought a declaratory judgment that either Lexington or AXIS was required to defend and indemnify it against Pitt’s claims.

FACTUAL BACKGROUND

Ballinger, the original plaintiff in this action, held a professional-liability insurance policy with Lexington covering the period of February 1, 2011, to February 1, 2012. (Def. Rule 56.1 ¶ 1.) In February 2012, Ballinger switched its professional liability policy to AXIS (the “AXIS Policy”), which began coverage simultaneously with the termination of Lexington’s coverage at 12:01 a.m. on February 1, 2012. Both the Lexington and AXIS policies were claims-made policies.

In 2011, construction began on the Salk Hall Project for which Pitt had contracted with Ballinger as its design and architecture firm. In previous filings in this matter, Pitt stated that Ballinger became aware of problems with the Salk Hall Project soon after construction began, and that “Ballinger knew, during the Lexington policy period, of circumstances arising from its Professional Services at the Salk Hall Project that were reasonably likely to result in a claim being filed against it.” “By January 2012,” Pitt has stated, “senior executives at Ballinger knew that the Salk Hall Project was progressing more slowly than had been anticipated [,]” that “a subcontractor had made statements that, in the experience and judgment of Ballinger’s executives, suggested that the contractor could well assert a claim against Pitt[,]” and that “Ballinger was aware that Pitt, in turn, could assert that claim or a variant of it against Ballinger.”

On March 5, 2012, Lexington refused to defend and indemnify Ballinger for any claims arising from the Salk Hall Project due to insufficient information in Ballinger’s notice of claim. Ballinger then notified AXIS on March 27, 2012, that “the insured feels strongly that a claim will be filed against it in this instance. As you will note, this matter has been previously been reported to Lexington, and they denied for the reasons set forth in the March 5, 2012 letter.”

On October 31, 2012, Pitt sent a letter to Ballinger identifying errors and omissions at the Salk Hall Project and notifying Ballinger that it sought damages arising from problems with, inter alia, “Hillside Stabilization” and “Mine Grouting” related to site stabilization and the foundation redesign.

LEGAL PRINCIPLES

The nature of a claims-made policy is that it protects the insured for claims made against it and reported to the insurer within the policy period or, if applicable, the extended reporting period.  This is in contrast to an “occurrence” policy, which protects the insured from liability for acts committed during the policy period regardless of when claims arise based on those acts.

DISCUSSION

Either Ballinger’s January 31, 2012, submission to Lexington was sufficient to trigger AXIS’s prior-notice exclusion (even if insufficient to comply strictly with Lexington’s formal notice requirements) and therefore to bar coverage under the AXIS Policy; or a principal of Ballinger had knowledge sufficient to create a reasonable expectation of a claim prior to the beginning of the AXIS Policy period such that coverage is precluded for that claim.

Pitt’s fundamental premise is that one of the two insurance carriers must have a coverage obligation. It is certainly possible that a party could fail to adequately comply with notice provisions required for one policy (here, the Lexington policy), and yet, because of the circumstances, not be covered under a second, subsequent policy (here, the AXIS policy).

On the facts here, any reasonable juror would have to conclude that a principal of Ballinger had a reasonable expectation of liability prior to February 1, 2012. This determination was sufficient to deny coverage under the AXIS Policy.

As set forth above, the AXIS Policy does not provide coverage if, prior to its effective date of February 1, 2012, a principal of the insured “had knowledge of any act, error, omission, situation, or event that could reasonably be expected to result in a Claim.” The term “reasonably be expected” is not ambiguous; it means that a claim will be covered if it was reasonably foreseeable under the facts known to the insured (or its principal) before commencement of the AXIS Policy coverage period.

AXIS has put forth sufficient facts showing that prior to February 1, 2012, French (an undisputed principal of Ballinger) believed that a claim arising from delays in the Salk Hall Project was “inevitable” and that there was a “possibility” that this inevitable claim would be against Ballinger. On these undisputed facts, any reasonable juror would have to conclude that the claim against Ballinger was reasonably foreseeable to French based on his knowledge of the Salk Hall Project “situation” prior to February 1, 2012.

Once AXIS met this burden, the burden shifts to Pitt to set out specific facts showing a genuine issue of material fact for trial.. Pitt has not carried that burden. Based on the undisputed facts before the Court on this motion, the potential claim of which Ballinger gave notice to AXIS on March 27, 2012, arose from the same set of circumstances—construction delays and problems relating to site stabilization and foundation redesign—that led Ballinger (according to French’s deposition) to submit a Notice of Claim to Lexington on January 31, 2012. The policy does not require certainty. It requires only a “reasonable expectation.”

Given French’s statements that, prior to the AXIS policy effective date, he thought a delay was inevitable and that the “possibility” of a claim against Ballinger was strong enough that Ballinger had a “responsibility” to report it to its insurer, no reasonable juror could conclude that he did not have a “reasonable expectation” of a claim against Ballinger. Pitt, in an attempt to defeat the Lexington motion itself stated that “Ballinger knew, during the Lexington policy period, of circumstances arising from its Professional Services at the Salk Hall Project that were reasonably likely to result in a claim being filed against it.” (emphasis added by the court).

Pitt’s fundamental problem is that, on the facts before the Court on the Lexington and AXIS motions, Ballinger did not respond to its knowledge of potential liability with the care and promptness required by terms of its insurance contracts. The result of Ballinger’s failure to comply with the policy terms is that Pitt cannot shift its loss to either carrier. The Court’s decision does not, as Pitt alleges, create an unfair forfeiture—Ballinger was never entitled to unconditional indemnification, even if it purchased two back-to-back policies. It must always comply with the policy’s requirements. Here, it did not.

The basic structure of risk distribution in claims-made insurance coverage policies the insured party with knowledge of potential liability is incenvitized—indeed, required—to share that knowledge in a sufficiently timely, clear, and comprehensive manner with the party that has agreed to share in the risk of liability.

To conclude otherwise would effectively hold AXIS to a strict-liability coverage standard for which it did not contract and for which it was not paid.

ZALMA OPINION

Claims made and reported policies require strict compliance with notice provisions and questions on applications regarding known losses or losses that are expected. Here, the insured did not fulfill the incentive to report potential losses promptly and, as a result, lost the ability to have its late claim defended and a indemnity if a claim or suit occurs.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness 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 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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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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