“As Soon as Practical” is Not Nine Months
Errors and omissions (E&O) policies are usually “claims made” or “claims made and reported” policies. As a result, the insured is compelled to report any claim made against it promptly upon receiving a claim and in no event after the expiration of the policy period in which the claim was made.
In James River Insurance Company v. Timcal, Inc., and Fidelity National Property & Casualty Insurance Company, Appellate Court of Illinois First District Second Division, 2017 IL App (1st) 162116, No. 1-16-2116, (June 30, 2017) was asked to compel coverage even though evidence established that the first report of a claim came nine months after the loss.
In July 2012, TimCal, Inc., an insurance agent affiliated with Geico Direct Representatives, received from Fidelity National Property & Casualty Insurance Company a letter, charging TimCal with breach of its duties as an insurance agent and informing TimCal that Fidelity would seek to recover damages.
TimCal did not inform its professional liability insurer, James River Insurance Company, about the claim until April 2013. James River filed a complaint against TimCal and Fidelity, seeking a judgment declaring that it had no duty to defend or indemnify TimCal because TimCal failed to provide timely notice of Fidelity’s claim to James River. The circuit court granted James River’s motion for summary judgment.
In 2011, James River issued a professional liability insurance policy to Geico Direct Representatives. Under the policy, James River promised to provide coverage when an insurance agent affiliated with Geico Direct made an error in selling an insurance policy, and the error harmed either the insurance purchaser or the insurance seller.
In December 2011, TimCal arranged the sale to Dwayne Swimley of homeowner’s insurance from Fidelity. On April 5, 2012, a fire severely damaged Swimley’s home. Fidelity paid Swimley’s claim. Fidelity sent to TimCal a letter dated July 9, 2012, saying: The Swimley residence was constructed as a single family residence and was subsequently remodeled so that the second floor contained a separate apartment, complete with kitchen. At the time he applied for insurance through TimCal, Swimley had 4 tenants or roomers residing at the insured premises. Fidelity accused TimCal of failing to properly ensure that the proper information was collected for the application. Fidelity further stated that had it known that the residence actually contained two separate living units and four tenants, it would not have extended coverage for the residence. Fidelity further stated that it was damaged in the amount it will be required to pay Swimley for his claim for damages to the residence, which is presently reserved at $576,500.00. Finally, it demanded that TimCal report the loss to its E&O insurer.
In October 2013, James River sued TimCal and Fidelity, asking the court to enter a judgment declaring that James River had no duty to defend or indemnify TimCal in the anticipated lawsuit from Fidelity, due to lack of timely notice.
The circuit court agreed with James River’s assertion that the policy provided no coverage because TimCal failed to notify James River of the claim during the October 1, 2011, to October 1, 2012, policy period, and that the renewal policy, which covered October 1, 2012, to October 1, 2013, provided no coverage because TimCal knew of the claim by July 9, 2012, before the policy period began. The circuit court granted James River’s motion for summary judgment.
Fidelity argues on appeal that a material issue of fact remains as to when TimCal first reported the claim to James River and that both of James River’s policies include ambiguities that make summary judgment improper.
James River supported its motion for summary judgment with two affidavits from James River employees, who explained their responsibilities in connection with TimCal’s claim. They averred that James River first received notice of Fidelity’s claim against TimCal on April 3, 2013. Fidelity admitted in its answer to the complaint that it had no evidence to either affirm or deny James River’s allegation that it first received notice of Fidelity’s claim against TimCal on April 3, 2013.
The James River policies define a claim as “a written demand for monetary damages.” Fidelity argues that we should not consider the letter of July 9, 2012, a claim because Fidelity did not demand a specific dollar amount of compensation ignoring that the letter sought whatever amount they would pay and advised TimCal of the amount it had reserved for the fire claim.
Our research uncovered one case interpreting a policy with the language used here. In Precis, Inc. v. Federal Insurance Co., 184 F. App’x 439 (5th Cir. 2006), the claimant, Kirk, sent a letter to Precis in December 2002, demanding compensation for damages that resulted from Precis’s alleged misconduct. Kirk said that the damages exceeded $1.5 million. The policy from Federal covering Precis defined a “claim” as “a written demand for monetary damages.” Precis, 184 F. App’x at 441. The Precis court said, “[t]he fact that Kirk does not propose a specific amount for settlement does not mean that the letter is not a demand for money.”
In the letter of July 9, 2012, Fidelity demanded payment of monetary damages, even though it did not specify a settlement amount or its total damages. The term “Claim” in the policies James River issued to Geico applies unambiguously to the letter Fidelity sent on July 9, 2012.
Fidelity finds ambiguity in the policies’ requirement that TimCal had an obligation to provide notice of the claim during the policy period in which it received the claim. Both policies cover damages payable for claims “first made against the ‘Insured’ and reported to us in writing during the ‘Policy Period’.” The policies expressly define “Policy Period” as “the period of time shown in the Declarations.”
There is no ambiguity in the application of the terms of the policies to the claims here. Fidelity sent a written claim against TimCal to TimCal on July 9, 2012, within the policy period of the first policy, and TimCal did not report the claim to James River until April 3, 2013, long after the end of the policy period.
TimCal, by clear evidence, failed to report the claim to James River during the policy period in which Fidelity made the claim. Therefore, neither of the policies James River issued to Geico provides coverage for the claim.
The court noted that, apart from the failure to report the claim during the policy period in which Fidelity made the claim, TimCal also failed to report the claim “as soon as practicable, but in no event later than 60 days after the end of the ‘Policy Period’ of any ‘Claim’ made against you,” as the policies required.
Because TimCal failed to report the claim “as soon as practicable,” James River had no duty to defend or indemnify TimCal for the claim.
The letter Fidelity sent to TimCal in July 2012 unambiguously qualifies as a claim within the meaning of James River’s insurance policy. Because TimCal did not notify James River of the claim until April 2013, neither the 2011-12 policy nor the 2012-13 policy provides coverage for the claim.
An insurance agent, like TimCal, must be considered a professional who can read and understand an insurance policy. When the insured received a claim from Fidelity it, as an insurance professional, should have known it was obligated – as the demand letter stated – immediately report the loss to the E&O insurer. It did not. It ignored its obligation, and did not report the claim until after the policy expired and was replaced with a new policy, nine months after the loss.
This article and all of the blog posts on this site digests 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 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 the first annual Claims Magazine/ACE Legend Award.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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