Claims Made Policy Requires Timely Notice
Liability insurers prefer claims made policies to limit their exposure. The person or entity insured must, under such policies, report a claim as long as it is made during the policy period or an extended reporting period or lose coverage.
In Crowley Maritime Corporation v. National Union Fire Insurance Company
Of Pittsburgh, PA, No. 18-10953, United States Court of Appeals for the Eleventh Circuit (July 23, 2019) Crowley Maritime sued its insurer, National Union, seeking reimbursement in legal defense fees paid on behalf of an employee of Crowley. The district court granted National Union’s motion for summary judgment on grounds that Crowley failed to timely report the claim at issue in this appeal to National Union as required by the policy. The trial court held that, with respect to the reporting period Crowley was bound by the arbitration panel’s finding that Crowley had not reported a claim to National Union as required by the policy.
Crowley Liner is a wholly owned subsidiary of Crowley Maritime. National Union is among the largest providers of directors and officers insurance policies. As it relates to this case, Crowley Maritime purchased liability insurance from National Union which provided coverage on a “claims made” basis, meaning that National Union insured Crowley “solely with respect to Claims first made against an Insured during the Policy Period or the Discovery Period (if applicable) and reported to the Insurer pursuant to the terms of [the P]olicy.”
During the initial Policy Period Crowley Liner’s then-Vice President of Price and Yield Management, attracted the attention of federal law enforcement officers. On April 17, 2008, a search warrant was executed at Crowley Liner’s Jacksonville headquarters. On April 16, 2008, the day before federal law enforcement officers executed the search warrant, an FBI special agent signed and delivered an affidavit supporting the search warrant (the “Affidavit”) to a federal magistrate judge in the Middle District of Florida. The Affidavit—which spans forty-eight pages and describes in great detail an ongoing FBI/DOJ antitrust investigation involving several water freight carriers—asserted that Farmer and others had been involved in communications and agreements to allocate customers and coordinate pricing in violation of the Sherman Act. The affidavit was sealed.
A little over a week later Crowley’s insurance broker sent National Union a notice it characterized as a notice of a Claim. National Union responded and concluded that the Policy did not provide coverage because, in part, no one had been identified in writing as a target of the investigation as required by the Policy. National Union also encouraged Crowley to send additional information that might be relevant to its coverage determination.
Arbitration Panel Enters Decision Favoring National Union’s Position
Crowley eventually initiated arbitration with National Union. The proceeding addressed whether, based on the information provided to National Union at the time of the arbitration hearing, the FBI/DOJ investigation constituted a Claim under the Policy. The arbitration order noted that the evidence of a Claim presented to National Union at that time included only: the search warrant, the Farmer and Crowley subpoenas, several documents relating to a plea agreement entered into by Crowley, and the investigation relating to those documents.
A majority of the arbitration panel entered a decision in favor of National Union. The arbitration order observed that “the triggering event for a Claim . . . is when the DOJ identifies in writing an Insured Person as one against whom a criminal proceeding may be commenced.” It continued, ultimately concluding that “[t]he materials Crowley submitted to National Union did not constitute a Claim for Insured Persons as the term ‘Claim’ is defined in the Policy. The triggering event specified in the Policy has not yet been presented to National Union.”
Farmer Receives and Rejects Plea Offer, Is Acquitted at Trial
Crowley notified National Union of the Plea Offer and National Union agreed to treat the FBI/DOJ investigation as a Claim under the Policy as of February 18, 2013 (the date it received the February 2013 Notice). National Union agreed to provide coverage for future Defense Costs relating to the investigation (i.e., those incurred on or after February 18, 2013), but took the position that Crowley was not entitled to reimbursement of its earlier Defense Costs.
A federal jury in Puerto Rico found Farmer not guilty and the United States District Court for the District of Puerto Rico entered a judgment of acquittal and Crowley notified National Union that Farmer had been acquitted and it demanded reimbursement of $2,541,346.34 in legal fees Crowley paid on Farmer’s behalf (net of the Policy deductible). National Union refused.
National Union did cover almost $3 million in Defense Costs incurred in connection with Farmer’s defense after it received Crowley’s February 2013 Notice.
As noted above, the issue in this case involves only whether Crowley is entitled to coverage, and thus reimbursement from National Union, of its pre-February 2013 (pre-Plea Offer) Defense Costs, on behalf of the Insured, Farmer.
Crowley is bound by the arbitration panel’s finding that Crowley had not reported a Claim to National Union as required by the Policy. With respect to the reporting period beginning immediately after December 31, 2012 and running through the end of the Discovery Period on November 1, 2013, Crowley failed to report the Claim based on the Affidavit as required by section 7(a) of the Policy because it did not report any new information about the Claim based on the Affidavit until after both the Policy Period and the Discovery Period had expired.
The Essence of a Claims-Made Policy
Claims-made policies differ from traditional “occurrence”-based policies primarily based upon the scope of the risk against which they insure. With claims-made policies, coverage is provided only where the act giving rise to coverage is discovered and brought to the attention of the insurance company during the period of the policy. Insurance companies favor claims-made policies because they allow for a more precise calculation of risks and premiums.
In pertinent part, section 2(b) of the Policy defines a Claim as (1) a written demand for relief; (2) a criminal proceeding commenced by return of an indictment, information, or similar charging document or receipt or filing of a notice of charges; or (3) a criminal investigation of an Insured Person “once such Insured Person is identified in writing by such investigating authority as a person against whom a proceeding [described in section 2(b)(2)] may be commenced.”
Under the language of this particular insurance contract, the substantive content of the Affidavit clearly did constitute a Claim. It is sufficient to say that the forty-eight-page Affidavit identified Farmer by name more than fifty times, noted that he held a “position of pricing authority” at Crowley Liner, and otherwise made it clear to us that the Affidavit identified Farmer as a person against whom a criminal proceeding may be commenced.
National Union’s res judicata argument is persuasive. In modern times, the preclusive effect of a judgment is defined by claim preclusion and issue preclusion, which are collectively referred to as res judicata. The arbitration order precludes Crowley from re-litigating the issue of whether it reported a Claim to National Union on or before December 31, 2012. The Eleventh Circuit concluded that the question whether Crowley reported a Claim to National Union was “actually litigated” in and a “critical and necessary part” of the arbitration proceeding.
At best, the act of unsealing the Affidavit in 2015 confirmed that a Claim might have been “first made against” Farmer on April 16, 2008; it did nothing to change the fact, as determined by the arbitrators, that Crowley had not reported a Claim to National Union as of December 31, 2012.
Crowley insisted on arbitrating its dispute with National Union to resolve the issue of prompt reporting of a claim. The arbitrators, to the surprise of Crowley, ruled in favor of National Union. Not satisfied with just receiving $3 million in defense costs after actually reporting a claim that named Mr. Farmer, Crowley sought all of its defense costs even though it had not, according to the arbitrators, timely reported a loss. The Eleventh Circuit, therefore, found that Crowley was bound to the decision made by the arbitrators.
© 2019 – 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 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 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.
Excellence in Claims Handling Courses From Experfy.com
The Excellence In Claims Handling program provides everything a person or entity presenting a claim needs to effectively present the claim and provides the insurance claims person with everything he or she needs to properly represent the insurer.
The insured, risk manager, or corporate counsel will be able to present a first party property claim – whether a fire, theft, or windstorm or some other insured against cause – with little difficulty and professionalism and present a sworn proof of loss acceptable to an insurer.
The insurance claims person completing the course will be able conduct a thorough investigation of the policy and claim. The insurance claims person will also be able to assist an insured to fulfill all of the promises made by the insured to the insurer and the insurer to provide the indemnity promised by the insurance policy.
The series of courses was designed so that the student can obtain the needed information easily while he or she sits down in the morning for a first cup of coffee or any other time in the day in short, easy to consume lessons. For instance “Insurance and Claims” is made up of three modules and 27 lectures while “Investigating the Property Claim” is made up of four modules and 65 lectures. You can review each course, each module and each lecture at the links below.
Each person completing the course will be able to claim that he or she is a professional first party property claims person ready to provide excellence in claims handling and be ready to resolve any claims problem that arises for the benefit of the insurer and the policy holder.
Insurance and Claims: https://www.experfy.com/training/courses/insurance-and-claims
Investigating the Property Claims: https://www.experfy.com/training/courses/investigating-the-property-claim
Insurance Law: https://www.experfy.com/training/courses/insurance-law
Solving Claims Problems: https://www.experfy.com/training/courses/solving-claims-problems