POSITIONING FOR THE BUSINESS INSURANCE CLAIM Caroline W. Spangenberg Kilpatrick Townsend & Stockton LLP, Atlanta - PDF

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These materials were part of a Continuing Legal Education program of the North Carolina Bar Association Foundation. They are posted with the express permission of the North Carolina Bar Association Foundation.
These materials were part of a Continuing Legal Education program of the North Carolina Bar Association Foundation. They are posted with the express permission of the North Carolina Bar Association Foundation. All rights reserved. POSITIONING FOR THE BUSINESS INSURANCE CLAIM Caroline W. Spangenberg Kilpatrick Townsend & Stockton LLP, Atlanta I. SCOPE NOTE This article describes important steps to be taken to maximize the value of a business insurance claim. It takes a practical approach to positioning the business insurance claim and puts the advice into the context of existing case law. The article emphasizes North Carolina law, but because some North Carolina claims may be governed by another state s law 1, it also references general insurance coverage trends. It includes as exhibits a one-page summary of the recommendations and examples of a notice letter and a response to a reservation of rights. II. DISCLAIMER Insurance coverage is one area of the law that is in constant flux. Insurers so-called standard policies are not the same and are frequently revised. Seemingly small differences in language or punctuation can have dramatic effects on a claim s outcome. Moreover, different states can, and do, take diametrically opposite views of the same policy language. Particularly because different states also have different approaches to conflicts of laws, it is almost impossible to generalize or to give advice that is good in all circumstances. In this area of the law, more than most others, there is an exception to every rule. Information contained in this article and presentation is not intended to, and does not, constitute the rendering of legal advice or to create an attorney-client relationship. The views expressed are not to be attributed to Kilpatrick Townsend & Stockton LLP nor any of its clients. 1 North Carolina General Statues specifies that North Carolina law governs [a]ll contracts of insurance on property, lives, or interests in this State. Collins & Aikman Corp. v. Hartford Accident & Indem. Co., 436 S.E.2d 243, 245 (N.C. 1993) (applying North Carolina law to a policy procured in California.). See also Cont l Cas. Co. v. Physicians Weight Loss Ctrs. Of Am., Inc., 61 F. App x 841 (4th Cir. 2003) (applying North Carolina law). This does not necessarily mean that North Carolina law will be applied. See, e.g., Boardman Petroleum, Inc. v. Federated Mut. Ins. Co., 135 F.3d 750 (11th Cir. 1998) (11th Circuit applies Georgia law where insured resides and policy was delivered to a dispute involving a South Carolina location, notwithstanding that South Carolina has a similar statute). This can generate the proverbial race to the courthouse. See page 6, infra. III. RECOMMENDED STEPS TO MAXIMIZE VALUE OF AN INSURANCE RECOVERY CLAIM A. Prepare in advance and implement appropriate insurance protocols. Enterprise risk management is important. One needs to complete a rigorous identification and analysis of the business principal risks, including quantification of its associated maximum potential loss, in order to design and implement good risk management, including an appropriate insurance program. For example, books have been written about the life-threatening issues faced by AIG in late Although the causes of AIG s problems are debated and continue to be the subject of litigation, many believe the root cause was a failure of risk management not recognizing the danger that collateral calls on exotic instruments could pose to the entire company. If one does not recognize the risk, one does not insure against it or implement other mitigation strategies. So, the first step in maximizing insurance recoveries is to recognize the risk and obtain proper protection against it. It is also important to assemble a team and implement processes and procedures in advance of a serious claim. Just as with disaster recovery and enterprise continuity planning, there is no substitute for having a well-trained team in place before the claim arises. One does not want to be hunting for the appropriate insurance policies, assessing the scope of coverage and identifying which carriers to notify while one is trying to deal with the underlying problem. Even more routine matters benefit from having insurance protocols in place. B. Review your policies carefully. Assess what losses they cover and to what extent. Having identified the risks against which to insure, there is no substitute for reading the policies, word for word, beginning to end. It is not enough to rely on broker s summaries. Baggett v. Summerlin Ins. & Realty, Inc., 554 S.E.2d 336 (N.C. 2001) (per curiam) (action against broker barred in circumstances by failure to read policy). But cf. ABT Bldg. Prods. Corp. v. Nat l Union Fire Ins. Co. of Pittsburgh, 472 F.3d 99 (4th Cir. 2006) (correct extension of policy period not reflected on declaration page but buried in an endorsement). Policies are intended to be read as a reasonable lay person would read them not as a lawyer or an insurance professional would read them. W & J Rives, Inc. v. Kemper Ins. Grp., 374 S.E.2d 430 (N.C. Ct. App. 1998); Grant v. Emmco Ins. Co., 243 S.E.2d 894 (N.C. 1978). Unfortunately, this is a precept that is 2 sometimes honored more in breach than in observance. For example, loss, even if it is broadly defined as including damages, judgments and settlements, may not include amounts paid as restitution. E.g., Level 3 Commc ns, Inc. v. Fed. Ins. Co., 272 F.3d 908 (7th Cir. 2001). But see Bank of Am. Corp. v. SR Int l Bus. Ins. Co., No. 05-CVS 5564, 2007 WL (N.C. Super. Ct. Dec. 19, 2007) (settlement of Sections 11 and 12 securities claims covered); Stratton v. Royal Bank of Can., 712 S.E.2d 221 (N.C. Ct. App. 2011) (claim was in the nature of conversion, not restitution). Seemingly minor differences in phraseology or punctuation can have significant effects. For these reasons, it may be prudent to consult an expert to assist in the policy review; regardless, the review should be completed promptly upon receipt of the policy to confirm that the policy covers what was intended. As discussed below, doubts regarding coverage should be resolved in favor of sending prompt notice of the claim or occurrence to the carrier. Policies contain mistakes particularly in listing the correct corporate names for all insureds or in correctly identifying all underlying insurance. Generally, the insured bears the burden of proving a mutual mistake in order to reform the policy. Metro. Prop. & Cas. Ins. Co. v. Dillard, 487 S.E.2d 157 (N.C. Ct. App. 1997) (policy had wrong street number); Stockton v. N.C. Farm Bureau Mut. Ins. Co., 532 S.E.2d 566 (2000) (policy issued to Oak Farm, a non-existent entity). One is also supposed to act promptly to reform the policy. When caught upon initial review, mistakes are usually easily rectified. It is a different story after a claim is made. This applies equally to others policies under which one is named an additional insured. One cannot know what protection one has gained thereby without reading the policy. However, because of the associated transactional costs, virtually everyone as a matter of custom and trade usage relies on certificates or memoranda of insurance, perhaps including the additional insured endorsement to the policy. Such customary reliance is, in reality, little protection if something goes wrong. As stated on the typical ACORD certificate, it confers no rights to coverage. Only the policy itself can do that. For these reasons, many insureds (1) insure on an excess basis for such risks, (2) identify particularly significant transactions and negotiate for a review of the entire policy, or (3) do both. For all of these reasons, one should carefully review the policy when issued and assess the scope of the coverage against the risks sought to be insured. 3 C. Consider notifying immediately after an accident or at the incipient stages of a dispute. Most policies that are occurrence -based 2 require notification to the insurer as soon as practicable, immediately, or phrases of similar import, of any claim or suit. See, e.g., Royal Ins. Co. of Am. v. Cato Corp., 481 S.E.2d 383, 386 (N.C. Ct. App. 1997) (endorsement delaying reporting of occurrences until known by risk manager does not delay reporting of claims or suits). 3 Note that although the insurance company may have a duty to defend suits, but not claims, the notification requirement often includes both. A policyholder should not hope that it can delay notice because the occurrence is not expected to give rise to a lawsuit. Thus, most occurrence - based policies require notification of occurrences which may give rise to a suit. Great Am. Ins. Co. v. C.G. Tate Constr. Co., 279 S.E.2d 769, (N.C. 1981). A failure promptly to notify of such occurrences if made a condition precedent as almost all policies do can be fatal to coverage for a later lawsuit alleging claims that would have been insured under the policy. Id. Timely notice is similarly required under claims-made policies. Policies insuring against liability for negligently rendering professional services (architects, doctors, engineers, accountants and lawyers policies) and policies insuring corporate directors and officers typically are written on claims-made forms Indeed, under such policies, it is the claim and not the underlying occurrence that triggers coverage and a duty to notify the carrier. 4 Compliance with prompt notice requirements can be even more difficult in a claims-made or a claims-made and reported policy. Many policies have broad and elastic claim definitions. Some do not even require that the claim be in writing; an oral demand is sufficient. Although a broad claim definition may be desirable 2 Occurrence-based policies cover liabilities arising out of occurrences during the policy period regardless of when the claim is brought. See, e.g., Hobson Constr. Co. v. Great Am. Ins. Co., 322 S.E.2d 632, 635 (N.C. Ct. App. 1984) ( property damage must occur during policy period). 3 This is a useful endorsement. Otherwise, knowledge of any employee may be deemed to trigger a notice requirement. 4 Claims-made policies cover claims made or first made during the policy period without regard (apart from retroactive date limitations or prior or pending claims exclusions) to when the wrongful act giving rise to the claim occurred. Claims made and reported policies additionally expressly require as part of the coverage grant that the claim be reported to the insurer during the policy period. As used in these materials, the term, claims-made policies includes both claimsmade and claims-made and reported policies, unless otherwise stated. 4 for the scope of coverage, it can raise thorny issues with respect to mandatory notice requirements. 5 This problem is compounded by inter-related claims or wrongful acts provisions found in most claims-made policies. 6 First, the case law as to what constitutes a related claim is irreconcilable: courts reach opposite results on similar facts and policy language. Compare, e.g., Allmerica Fin. Corp. v. Certain Underwriters at Lloyds, London, 871 N.E.2d 418 (Mass. 2007), with WFS Fin., Inc. v. Progressive Cas. Ins. Co., 232 F. App x 624, 625 (9th Cir. 2007). Second, not reporting the first of a number of inter-related claims in a timely fashion forfeits coverage not only for the first claim but for all the others. 7 Most claims-made policies permit the insured to notify of circumstances or potential claims, thereby triggering the insurance policy in effect at the time the notice is given. Then, when the actual claim is asserted, it relates-back to the earlier policy. 8 Reporting circumstances or a potential claim can be a useful option where one is uncertain whether a claim has been asserted. However, because some policies require that the report be made with great specificity or full particulars, one needs carefully to craft the description of the circumstances or potential claims at issue. Moreover, unfortunately, some newer policies make notification of potential claims or circumstances mandatory, not optional. In short, it is critical that a knowledgeable risk manager, general counsel, or outside counsel be involved at the incipient stages of a dispute or shortly after an accident, as the case may be, to determine when notice is required and how best to accomplish the notice. 5 Thus, insurers have been known to argue that a construction defect claim was first made when the insured received punch-list type correspondence. Failure to report the first such claim may bar coverage for a lawsuit filed years later. 6 One such provision reads: All Claims arising out of the same Wrongful Acts and all Interrelated Wrongful Acts of the Insureds shall be deemed to be one Claim, and such Claims shall be deemed to be first made on the date the earliest of such Claims is first made, regardless of whether such date is before or during the Policy Period Interrelated Wrongful Acts mean all Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of related facts, circumstances, situations, events, transactions or circumstances. 7 Thus, under newer employment practices liability ( EPLI ) policies, not reporting the first EEOC charge (or sometimes an unemployment benefits application that complains about an employer s actions) can vitiate coverage for the later discrimination case. E.g., Munsch Hardt Kopf & Harr P.C. v. Executive Risk Specialty Ins. Co., No. 3:06-CV-01099, 2007 WL , at *4 (N.D. Tex. Mar. 8, 2007). 8 Sometimes, however, although the later claim relates-back to the time the notice was given, the insurer does not have a duty to defend until the claim is actually made. See Office Depot, Inc. v. Nat l Union Fire Ins. Co. of Pittsburgh, Pa., No , 2011 U.S. App. LEXIS (11th Cir. Oct. 13, 2011) (unpublished). 5 D. Notify, notify, notify. The consequences of untimely notice can be fatal. Under North Carolina law, if notice is untimely in an occurrence-based policy, but the insured acted in good faith, the burden shifts to the insurer to prove prejudice. Great Am. Ins. Co., 340 S.E.2d at 746; Kubit v. MAG Mut. Ins. Co., 708 S.E.2d 138 (N.C. Ct. App. 2011) (burden to show prejudice never shifted to Travelers where plaintiffs failed to show good-faith explanation for months delay); Fortress Re, Inc. v. Cent. Nat l Ins. Co. of Omaha, 766 F.2d 163, (4th Cir. 1985) (failure to notify reinsurer) (applying North Carolina law). However, other states are not so forgiving and conclusively presume prejudice if the notice is untimely. A few states are much more forgiving of late notice. These differences in state laws, among others, can prompt the proverbial race to the courthouse. Under a claims-made policy, late notice beyond the policy period is almost always fatal even without prejudice to the insurer. The cases are split whether if the notice is late but still within the claims-made policy period, prejudice to the insurer is required. See, e.g., Fin. Indus. Corp. v. XL Specialty Ins. Co., 285 S.W.3d 877 (Tex. 2009). Because of the draconian reporting requirements in a claims-made policy, many policies now provide that if a claim is first made shortly (sometimes fifteen to thirty days) before the end of the claims-made policy period, one has an extended period, typically fifteen to thirty days, sometimes longer, within which to notify. Please note that such an extension period, if granted, is not a general extension of the policy: insurers do not provide 13 months coverage for 12 months premium. This so-called grace period provision is designed to ameliorate the problem a company can face if it is sued at the very end of the policy period, i.e. the claim is made, but as a practical matter, it is virtually impossible to notify the insurer before the policy expires. A few courts have granted relief to policyholders in these circumstances. See Root v. Am. Equity Specialty Ins. Co., 30 Cal. Rptr. 3d 631 (Ct. App. 2005) (3 days); Cast Steel Prods. Inc. v. Admiral Ins. Co., 348 F.3d 1298 (11th Cir. 2003) (implying a short extended grace period where had the policyholder not renewed its coverage, it would have had the grace period) (Florida law). The recent trend is to enforce the policies as written. See, e.g., Charles Dunn Co. v. Tudor Ins. Co., 308 F. App x 149, 150 (9th Cir. 2009) (under claims made and reported policy, no coverage for claim made under one policy but reported under following policy). Longer extended reporting periods, sometimes referred to as discovery periods, under a claims-made policy are usually available for payment of an 6 additional premium in the event of a major transaction, such as a merger, purchase or sale of substantially all of the insured s assets, disposition or acquisition of a subsidiary, etc. One needs to be very careful in negotiating such extensions of coverage. Some policies provide that they remain in effect following such a transaction for the remainder of the policy period, but only for wrongful acts that occur prior to the transaction. It is not uncommon for the new policy to incept, that is, go into effect, at 12:01 AM on the day following the transaction. Obviously, this can result in no coverage at all for the transaction itself. Such a policy transition can also present great difficulties for ERISA, employment, or similar claims that straddle the closing date: the decisions may be made pre-closing, but they are fully implemented only post-closing sometimes weeks or months later. The same is true for allegedly wrongful procedures or practices that continue, at least for a while, with the new entity post-closing. Such claims can easily fall into a gap. Finally, many policies have a provision that excludes coverage for any claim for which notice was given earlier to another insurer. For this reason, it is important to be sure to notify all potentially applicable policies simultaneously. For example, often a claim against a non-public company may trigger coverage under both an employment practices liability policy (which insures against discrimination claims) and under a directors and officers liability ( D&O ) policy which typically insures the company in Coverage C, the entity coverage, against a broad range of wrongful acts. 9 Similarly, a defamation or product disparagement claim related to a website, can trigger both a general liability policy s personal and advertising injury coverage and an Internet/Technology policy. A worker s compensation claim can turn into a general liability claim. A financial fraud situation can invoke a commercial crime policy, a bankers professional liability policy, and a D&O policy. The list goes on. The important thing is to ensure notices are given to all potentially applicable policies simultaneously. See Kubit, 708 S.E.2d at (MAG Mutual notified months before Travelers); Canadyne-Georgia Corp. v. Cont l Ins. Co., 999 F.2d 1547 (11th Cir. 1993) (no prejudice required under Georgia law) (notice to EIL carriers years before notice to GL carriers). 9 Entity coverage (Coverage C) in a D&O policy issued to a public company typically is far narrower, often limited to Securities Claims. 7 E. Consider earlier occurrence-based policies or tail /extended reporting periods under earlier claims-made policies. In occurrence-based policies, coverage is typically triggered by the occurrence of bodily injury or property damage, even if the injury or damage is not manifest or discovered or a claim is not made until years later. 10 Gaston Co. Dyeing Mach. Co. v. Northfield Ins. Co., 524 S.E.2d 558, 564 (N.C. 2000) ( [W]here the date of the injury-in-fact is known with certainty, the comprehensive general liability policies on the risk on that date are triggered. ) (overruling in part W. Am. Ins. Co. v. Tufco Flooring E., Inc., 409 S.E.2d 692 (N.C. 1991)); accord Alliance Mut. Ins. Co. v. Guilford Ins. Co., No. C0A10-619, 2011 N.C. A
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