General liability policies (CGL) are occurrence based policies meaning an “occurrence” within the policy period triggers insurance coverage even if the claim is reported outside the policy period. (For more information on an occurrence within a CGL policy, please see https://floridaconstru.wpengine.com/insurance-risk-assessment-occurrence-duties-to-defendindemnify-coblentz-agreement/).
Professional liability policies (also known as errors and omissions policies), on the other hand, are routinely “claims made” policies, not occurrence based policies, meaning a “claim” for a wrongful act must be reported to the insurer within the policy period to trigger coverage.
There are claims made policies that have extended reporting (referred to as tail coverage) periods that allow the policy to still be triggered even if the claim is reported outside the policy’s period but within the extended reporting period. The insured may have to purchase this feature for additional premium in its claims made policy, but it is an important feature to protect the insured from gaps in coverage when a policy is not renewed, replaced with another policy, and/or cancelled. The reason is that if a policy is not renewed and replaced, the new carrier often advances the retroactive date to the start date of the new policy. Well, without an extended reporting period from the prior carrier, this means the insured may not have coverage for claims that are submitted to the new carrier due to a wrongful act prior to the retroactive date.
Claims made policies oftentimes contain a “retroactive date,” as mentioned above, that negates coverage for claims (wrongful acts) that took place prior to a specified date. Again, the retroactive date is often the start of the policy period. For instance, let’s say a professional liability claims made policy was written from April 1, 2014 through April 1, 2015 (the policy period). It may contain the April 1, 2014 as the retroactive date meaning that claims brought within the policy period but are the result of a wrongful act pre-April 1, 2014 would not be covered under the policy. This is why the extended reporting period / tail coverage becomes important!
Professional liability policies need to be reviewed because there are variations in policies and it is important to know what triggers a claim and when notice of a claim / potential wrongful act should be reported to the insurer.
An example of a professional liability claims made policy and its complicated application is discussed in Gidney v. Axis Surplus Insurance Co., 39 Fla. L. Weekly D741a (Fla. 3d DCA 2014). In this case, a mortgage brokerage firm arranged for privately funded mortgages through private investors. The firm was sued by a sole investor that claimed the firm negligently brokered and serviced the mortgages. The firm notified its professional liability carrier of the complaint (claim) within the policy period. Subsequently, a class action on behalf of all investors was filed against the firm. The professional liability insurer, in response to the complaint, filed a declaratory judgment action asking the court to declare there was no coverage under the policy for the class action since it was reported outside the policy period. The trial court issued the declaration in favor of the professional liability insurer and the investors appealed.
Of importance to understanding claims made policies, the Third District Court of Appeal analyzed importation provisions in the professional liability policy that are common to claims made policies although the language in the policies may be different. The Court first looked at the “claims first made” provision which discusses when the insurance will apply:
This insurance applies when a written Claim is first made against any Insured during the Policy Period. To be covered, the Claim must also arise from a Wrongful Act committed during the Policy Period.
The Company will consider a Claim to be first made against an Insured when a written Claim is first received by any Insured.
Next, the Court looked at the “related claims” provision that allowed related claims to relate back to the original notice of the claim (so that related claims reported outside the policy period would still be covered since they relate back to the timely reported claim). The related claims provision in the subject policy was to:
(a) to allow insurers to confine related wrongful acts to a single policy period and, thereby, a single liability limit, and
(b) to allow an insured to buy a new policy, despite facing additional liability exposure from its past acts, by having future related claims covered by the prior policy.
The Court then looked at the “reported wrongful acts” provision that allowed coverage if a written claim was submitted after the policy period but related to a wrongful act committed between the policy’s retroactive date and end of policy period and the insurer had notice during the policy period from the insured of the wrongful act. This provision is why providing the insurer notice of a potential wrongful act / claim that took place within the policy period is important. The reported wrongful acts provision provided:
This policy will apply to a written Claim first made against any Insured after the end of the Policy Period, but only if all of the following conditions are met:
(1) The Wrongful Act giving rise to the Claim is committed between the Retroactive Date and the end of the Policy Period;
(2) The Company receives written notice from the Insured during the Policy Period of the Wrongful Act. The notice must include all of the following information:
(a) The names of those persons or organizations involved in the Wrongful Act;
(b) The specific person or organization likely to make the Claim;
(c) A description of the time, place and nature of the Wrongful Act; and
1. A description of the potential Damages[.]
Lastly, the Court looked at the “multiple claims” provision that read:
All Claims arising from the same Wrongful Act will be deemed to have been made on the earlier of the following times:
(1) The date the first of those Claims is made against any Insured; or
(2) The first date the Company receives the Insured’s written notice of the Wrongful Act.
In reviewing this multiple claims provision, the Third District expressed: “[T]he Multiple Claims provision does not require that the insured anticipate the subsequent related claim or provide a description of the estimated damages that might result from any subsequent claim. Instead, in language crucial to this case, the policy states that all wrongful acts ‘related by common facts, circumstances, transactions, events and/or decisions . . . will be treated as one Wrongful Act.’” Based on this language, the Third District held that the class claim related back to the original investor’s claim which was within the policy period since it related to common circumstances, facts, events, and transactions; hence, there was coverage under the claims made policy.
As you can see, insurance policies are complicated and understanding all of the provisions is not an easy feat. It is important to work with your insurance broker and counsel, whether dealing with a claims made professional liability policy or occurrence based general liability policy, to preserve rights under policies and properly notify carriers of potential claims.
Please contact David Adelstein at email@example.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.