The Crucial Difference Between “Occurrence” And “Claims Made” Liability Insurance Policies

Neither “Waiver” nor “Estoppel” May Modify or Enlarge Risks Covered

Claims Made and Reported general liability policies are different from occurrence general liability policies because the reporting requirement defines the limits of the insurer’s obligation—if there is no timely notice, there is no coverage. No excuses are allowed. No argument available that the insurer was not prejudiced by the late report will be honred.

In Topp’s Mechanical, Inc., a Nebraska Corporation v. Kinsale Insurance Company, an Arkansas Insurance Corporation, No. 19-1991, United States Court of Appeals For the Eighth Circuit (August 4, 2020) Topp’s Mechanical, Inc. (TMI) bought a liability insurance policy from Kinsale Insurance Company. The policy excluded a “pollution incident” unless properly reported by TMI. After a pollution incident, Kinsale disclaimed coverage. TMI sued for breach of the policy. The district court granted Kinsale’s motion to dismiss.

FACTS

TMI sued Kinsale for breach of the policy, an indemnity policy. The policy had an “Exclusion – Absolute Pollution and Pollution Related Liability.” This pollution exclusion excluded coverage for “injury or damage arising directly or indirectly out of, related to, or, in any way involving” pollution incidents. An exception to the pollution exclusion—”Time Element Pollution Endorsement”—”modifies coverage under the Policy” if a pollution incident was: (1) “discovered by [TMI] within [7 days]” and (2) “reported to [Kinsale] in writing within [45 days].”

During the coverage period, TMI learned that an employee suffered injury from a pollution incident. Within seven days, a TMI representative called Kinsale about the incident, specifically asking if TMI should report it. Some unidentified person in the Kinsale claims department told TMI that it could not yet report the incident as a claim, and said it should wait until the employee filed a formal demand or lawsuit.

Nearly 18 months later, the injured employee made a formal demand. TMI forwarded it to Kinsale, requesting indemnification. Six weeks later, Kinsale disclaimed coverage. TMI sued Kinsale for breach of contract. After Kinsale removed the case from state court, the district court granted its motion to dismiss.

ANALYSIS

TMI acknowledges it did not follow the plain language of the contract because it reported the incident “in writing” more than 45 days afterward. Instead, it invokes waiver and estoppel because Kinsale told it to withhold reporting a claim until a formal demand was made or a lawsuit filed.

There is a “crucial difference” between “occurrence” and “claims made” liability insurance policies. Both types of policies require the insured to promptly notify the insurer of possible covered losses. With a claims made policy, however, that notice is not simply part of the insured’s duty to cooperate. It defines the limits of the insurer’s obligation—if there is no timely notice, there is no coverage. Under a claims-made policy, “the very description of the risk covered includes the requirement that claims be both made and reported within the policy period. [Esmailzadeh v. Speakman, 869 F.2d 422, 425 (8th Cir. 1989)].

TMI and Kinsale agreed to a claims made policy. It excludes pollution incidents. But it “modifies coverage” under the Time Element Pollution Endorsement, for incidents discovered within 7 days and reported within 45 days in writing.

Applying what it believed would be Nebraska law the Eighth Circuit noted that the Nebraska Supreme Court says that “waiver and estoppel are not available to broaden the coverage of a policy so as to protect the insured against risks not included therein or expressly excluded therefrom.” [Design Data Corp. v. Maryland Cas. Co., 503 N.W.2d 552, 559 (Neb. 1993)].

Estoppel cannot be invoked to expand insurance coverage or the scope of an insurance contract. Therefore, TMI cannot invoke waiver and estoppel to broaden—or as the policy states, “modifies”—coverage.

Waiver and estoppel do not apply in a claims made policy.  Waiver and estoppel cannot enlarge the risks covered by a policy and cannot be used to create a new and different contract with respect to the risk covered and the insurance extended.

ZALMA OPINION

The reason for the existence of a claims made policy, and the reduced premium over that required for an occurrence based general liability policy, is to limit the exposure faced by the insurer. It makes a prompt report – 45 days in this case – within the effective dates of the policy as a condition precedent to coverage. Even if TMI could prove that a representative of Kinsale incorrectly told them not to report the claim that fact did not change the material condition of the policy. The action of the purported employee of Kinsale did not change, nor could it, change the policy to enlarge the coverage written in the plain language of the policy. No insured of a claims made policy should fail to promptly report a known loss in writing, even if an unknown person on the telephone tells them not to report.


© 2020 – Barry Zalma

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.

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