Kevin LaCroix over at the D&O Diary has a nice piece on a new decision out of the Carolinas that has us insurance geeks talking, GS2 Engineering v. Zurich. The case puts front-and-center one of the most notorious and difficult “form over substance” claim denial practices in the liability insurance industry, where professional liability or Directors and Officers coverage is involved: that a claim was not reported during the right policy year. These kinds of policies are what is known as “claims made” policies, meaning that the policy will only provide coverage if the liability claim (demand letter, lawsuit, whatever) was made against the insured during the policy year. Pretty straightforward so far. But where it gets tricky is when the claim has to be reported. The policies break down into multiple camps on that front: they may be “claims-made-and-reported” (meaning the claim must be “reported” to the insurer during the policy year) or purely “claims made” in which case it doesn’t matter when the claim is “reported” so long as its reasonable – or it may be some kind of hybrid. It matters because generally if the policy is just “claims made” then if the reporting is “late” the insurance company has to show “prejudice” in order to deny the claim.
In the GS2 case the policy was (in my view) in that hybrid realm meaning that there needed to be a showing of prejudice. The claim was made during the policy year but reported during the next policy year. Tough toenails for the insured, said the court, which decided that the policy was “claims-made-and-reported.” The insurance company didn’t have to show that it was prejudiced in some way by the “late” reporting. The real kicker here is that as often happens the “next” policy year was a renewal with the same insurance company! How’s that for “the customer is always right!”
As Kevin observes (much more eloquently than I ever could) the rhetoric from the carriers and often the courts in these situations frequently takes on a moralizing, parental kind of tone: “You should have been more careful about when you reported this – maybe next time you’ll have learned your lesson!” That is absolutely the wrong way to look at this issue, IMHO. These are contracts of adhesion with tremendously confusing language that nevertheless play an important part in advancing sound public policy about allocation of risk. Permitting carriers to evade their contractual responsibilities without having to show prejudice, particularly when the policy is renewed, erodes public confidence in insurance generally, in these large financial institutions, and in the rule of law.