Are Claims-Made Policies Worth Issuing in Wisconsin from an Insurer’s Standpoint?
Various conditions are placed on insureds in terms of fulfilling their respective duties when it comes to ensuring coverage of a claim—e.g., cooperate in the defense of the claim, give accurate information, and do not consent or make voluntary commitments or payments without the insurer’s consent. One of the most heavily litigated of these duties is the insured’s duty to provide timely notice of the claim to its insurer. Depending upon the nature of the claim, untimely notice can complicate and prove detrimental to an insurer’s ability to defend, investigate, and/or settle the claim—rights that an insurer normally assumes under a typical occurrence-based general liability policy. When it comes to claims-made policies, however, notice to the insurer is even more important, given that such a policy is premised and underwritten based upon notice of a claim being provided within a discrete period. Given this distinction, should the consequences of untimely notice be the same as between an occurrence and claims-made policy? According to the Wisconsin Court of Appeals’ recent decision in Anderson v. Aul,1 the answer to that question is “Yes.”
Anderson v. Aul: The Notice-Prejudice Statutes Apply to Claims-Made Policies.
Attorney Thomas Aul (“Aul”) and his wife were member-owners of a real estate company, Aul Real Estate Investment Company, LLC (“Aul Real Estate”). The plaintiffs, Melissa and Kenneth Anderson (“the Andersons”), purchased real estate through Aul Real Estate, although Aul also represented their interests and had previously advised them to seek independent counsel. The Andersons did sign a conflict waiver. Despite that, when the Andersons became dissatisfied with Aul’s representation, their new counsel wrote to Aul on December 23, 2009, demanding payment in the amount of $117,125. Aul hired counsel to respond to the demand.
Wisconsin Lawyers Mutual Insurance Company (“WILMIC”) had issued a claims-made legal malpractice policy to Aul for the policy period covering April 1, 2009 through April 1, 2010.2 However, WILMIC did not receive notice of the claim from Aul until March 9, 2011, eleven months after the end of the 2009-2010 policy and over fourteen months after Aul first received the December 23, 2009 claim letter from the Anderson’s counsel. The Andersons filed suit against Aul on March 2, 2012, and WILMIC agreed to defend Aul under a reservation of rights. WILMIC then intervened in the action and moved for summary judgment on the ground, among others, that the claim was not covered because Aul did not provide timely notice. Finding in favor of WILMIC, the circuit court ruled that that there was no coverage under the policy because notice of the claim was untimely.
The language regarding notice was referenced in several places in Aul’s claims-made policy. On the declarations page it stated: “This policy is limited to liability for only those claims that are first made against the insured and reported to the Company during the policy period.” The front cover of the policy likewise provided:
THIS IS A CLAIMS MADE AND REPORTED INSURANCE POLICY. COVERAGE IS LIMITED TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE FIRST MADE AGAINST YOU AND REPORTED IN WRITING TO US DURING THE POLICY PERIOD.
Finally, the Insuring Agreement itself outlined that coverage extended to “claims first made against you and first reported to us in writing during the policy period.” This coverage section went on further to notify the insured that: “Your failure to send a written report of claim or claim incident to us within the policy period shall be conclusively deemed prejudicial to us.”3
The circuit court determined that Aul as a matter of law did not timely notify WILMIC of the claim under its 2009-2010 policy, and accordingly there was no coverage. The Wisconsin Court of Appeals reversed the circuit court’s decision, relying on Wis. Stat. §§ 631.81 and 632.26 (collectively referred to herein as the “Notice-Prejudice Statutes”).
Entitled “Notice and proof of loss,” Wis. Stat. § 631.81 states as follows:
Provided notice or proof of loss is furnished as soon as reasonably possible and within one year after the time it was required by the policy, failure to furnish such notice or proof within the time required by the policy does not invalidate or reduce a claim unless the insurer is prejudiced thereby and it was reasonably possible to meet the time limit.
Wisconsin Stat. § 632.26(2) states: “Failure notice as required by the policy as modified by sub. (1)(b) does not bar liability under the policy if the insurer was not prejudiced by the failure, but the risk of nonpersuasion is upon the person claiming there was no prejudice.”4
The court of appeals held that Wis. Stat. §§ 631.81 and 632.26 applied to the WILMIC 2009-2010 claims- made policy because such statutory provisions are written into “every liability insurance policy” issued in Wisconsin. Based upon this, the court of appeals held that, despite the undisputed fact that notice of the claim to WILMIC was untimely, the circuit court erred in failing to consider the issue of prejudice as outlined in §§ 631.81 and 632.26. Moreover, because WILMIC did not contest Aul’s assertion that “formal discovery had not yet started, no depositions were taken, and no deadlines were approaching denying WILMIC adequate time to investigate and defend,” the court of appeals found that WILMIC had not been prejudiced by Aul’s untimely notice of the claim.
There is little discussion by the court of appeals of the application of the Notice-Prejudice Statutes, including any potential discordance between those statutes and the language of the claims-made policy. In other words, by not addressing how to harmonize the statutory language of Wis. Stat. §§ 631.81 and 632.26—including whether those statutes apply in the first instance—with the policy language that extends coverage solely to claims “first made against you and first reported to us in writing during the policy period,” the court of appeals opened its analysis up to attack. In particular, the court in Aul failed to consider several factors central to the issues of untimely notice under claims-made policies—factors that would likely have led to a different outcome.
Fundamental Differences Between Claims- Made and Occurrence Policies
Timely notice and reporting of a claim within the defined period is a mainstay of virtually any claims- made policy. Not only does the policy language require strict compliance with the temporal requirements, but this required notice is, in essence, part of the bargained-for exchanged between the insurer and the insured. In the case of occurrence policies, the notice requirement is subsidiary to the event that ultimately triggers coverage, an event that can be undone by virtue of the insured’s failure to comply with a “condition” of coverage.5 Claims-made policies, on the other hand, make timely notice more than a condition precedent to coverage; timely notice is an express provision in the grant of coverage which terminates prospective coverage upon expiration of the policy period.6
Numerous courts have recognized this “critical distinction” between the role of notice in claims- made policies and the role of notice in occurrence policies, including the reasons for these differences.7 By assuming the Notice-Prejudice Statutes universally apply to all claims-made policies, the court in Aul ignored this very important distinction between claims-made and occurrence policies.8 As one commentator noted with respect to a fundamental principle behind claims-made policies:
An underwriter who is secure in the fact that claims will not arise under the subject policy ... after its termination or expiration can underwrite a risk and compute premiums with greater certainty. The insurer can establish his reserves without having to consider the possibilities of inflation beyond the policy period, upward-spiraling jury awards, or later changes in the definition and application of negligence.9
For the insurer, the primary advantage of a claims- made policy “is the limitation of liability to claims asserted during the policy period.”10 This in turn enables insurers to issue claims-made coverage at reduced premiums. Considering this typically results in lower premiums for an insured because there is almost no possibility of an open-ended claim arising after the policy, the function behind such policies is justified.11 Keeping premiums as low as possible, such as professional malpractice insurance for small and mid-size law firms, which are most typically written on a claims-made basis, helps keep the cost of practicing law to a minimum.12
The majority of courts have treated the issue of untimely notice under claims-made policies differently from occurrence-based policies, concluding that claims brought after expiration of the policy are not covered or that a finding of prejudice to the insurer is not mandated before denying coverage.13 In fact, courts confronted with these notice issues under claims-made policies have most typically relied upon the inherent differences between the two types of policies in terms of notice:
With claims-made policies, the very act of giving an extension of reporting time after the expiration of the policy period, as the district court proposes, negates the inherent difference between the two contract types.... Claims-made or discovery policies are essentially reporting policies. If the claim is reported to the insurer during the policy period, then the carrier is legally obligated to pay; if the claim is not reported during the policy period, no liability attaches. If a court were to allow an extension of reporting time after the end of the policy period, such is tantamount to an extension of coverage to the insured gratis, something for which the insurer has not bargained. This extension of coverage, by the court, so very different from a mere condition of the policy, in effect rewrites the contract between the two parties.14
It is true that many of the cases in which courts concluded that prejudice was not to be a consideration under claims-made policies did not involve Notice-Prejudice Statutes like the ones addressed in Aul. Most often the courts relied on various public policy grounds to strictly uphold the notice language of the policy.15
There are, however, other courts that have confronted substantially similar Notice-Prejudice Statutes and found that these statutes do not trump the notice language in claims-made policies.16 For example, in Charles T. Main, Inc. v. Fireman’s Fund Ins. Co., the Massachusetts Supreme Court was confronted with virtually the same issue as Aul, including a statute that codified the common law notice-prejudice rule. The Massachusetts statute read as follows:
An insurance company shall not deny insurance coverage to an insured because of failure of an insured to seasonably notify an insurance company of an occurrence, incident, claim or suit founded upon an occurrence, incident or claim, which may give rise to liability insured against unless the insurance company has been prejudiced thereby.17
Despite the statute’s broad reference to liability policies, the court in Charles T. Main held that the statute did not apply to claims-made policies because requiring prejudice under such policies “would defeat the fundamental concept on which claims-made policies are premised.”18 According to the court, a contrary result would eliminate the substantial, bilateral benefits to both insurers and insureds and likely result in such policies “vanish[ing] from the scene.”19 The same conclusion was reached by the Maryland Court of Appeals in T.H.E. Insurance Co. v. P.T.P. Inc.20
As these courts found, the real purpose of such Notice-Prejudice Statutes is to prevent coverage forfeitures for claims that have already attached, not to create coverage for claims that never attached in the first instance due to the policy mandates of not being first made and reported within the policy period. Yet, this seems to be the direction taken by the court of appeals in Aul. Just as the Massachusetts Supreme Court in Charles T. Main predicted could happen, the court’s holding in Aul allowing claims to be made outside of the policy period by application of the Notice-Prejudice Statutes undermines the integrity of these benefits and could reduce the capability of insurers to underwrite these more affordable types of policies in Wisconsin. The ruling seeks to blur the lines of distinction between claims-made and occurrence policies and could, in the long term, extinguish the availability of such policies in Wisconsin altogether.
The Court’s Disregard of the Clear Language of the WILMIC Policy
In addition to its disregard of the fundamental concepts behind claims-made policies, perhaps even more troubling is the Aul court’s ready dismissal of the clear language of the 2009-2010 policy that set forth the requirements for timely notice.21 Under Aul, no longer does a policy that limits coverage to claims “first made and reported during the policy period” mean what it says. In reality, now such policies require further analysis of the time frame beyond the expired policy period in order to ascertain, inter alia, whether notice was given as soon as reasonably possible, which side holds the burden of persuasion as to prejudice, and whether that party can prove or disprove prejudice to the insurer.
Not only that, the court completely disregarded the provision of the 2009-2010 policy in which the insured’s “failure to send a written report of claim or claim incident to us within the policy period shall be conclusively deemed prejudicial to [the insurer].”22 Ignoring this language contravenes such policies and leads to the inevitable conclusion that claims- made policies no longer have any real enforcement mechanism for untimely notice in Wisconsin. Thus, even if one is to assume that the Notice-Prejudice Statutes apply so that prejudice is a necessary component of such claims brought under claims- made policies, this bargained-for language holds no relevance to the issue of prejudice, which, according to the court, only entails whether the insurer “was hindered in its ability to investigate, evaluate, settle the claim or otherwise present an effective defense on the merits.”23 Surely, an insurer who is forced to cover a claim that was reported after the expiration of its policy period should be able to claim it was prejudiced by having to provide coverage for which it was not paid a premium, especially when the parties contractually agreed to the contrary.
The holding of Aul blurs the lines between claims- made and occurrence policies in Wisconsin and creates coverage obligations where none were contemplated. If this ruling is not reversed by the Wisconsin Supreme Court, which has accepted review,24 it will likely have an adverse impact on the willingness of insurers to issue claims- made policies in Wisconsin. From an insurer’s perspective, the hope should be that Aul will only minimally impact the cost or number of claims- made policies available, and not result in a complete desertion from the insurance market.
Pamela J. Tillman is a shareholder with the law firm of Meissner Tierney Fisher & Nichols S.C. in Milwaukee, Wisconsin, where her main areas of practice are devoted to complex insurance coverage litigation and business litigation. She has lectured on various insurance coverage and litigation topics including “Trying the Third-Party Litigation Case: A Coverage Lawyer’s Perspective,” “Bad Faith Insurance Claims in Wisconsin,” and avoiding professional liability pitfalls for attorneys and health care professionals. She has previously authored an article for, among others, the Wisconsin Defense Counsel on default judgments and their impact on insurance companies in Wisconsin and co-authored an article for the Civil Trial Counsel of Wisconsin on the effects of an insurer’s failure to defend under Wisconsin law. The author wishes to thank Jennifer A.B. Kreil whose initial discussions with her led to the writing of this article.
1 2014 WI App 30, 353 Wis. 2d 238, 844 N.W.2d 636. As work began on this article, the Wisconsin Supreme Court accepted the Petition for Review filed by WILMIC and, by the time this article is published, all briefing and oral argument will have been completed. The supreme court and court of appeals briefs for this matter can be found at: http://wscca.wicourts.gov/appealHistory.xsl;jsessi... d=45985A3048B92A5945DAF0CB2386587A?caseNo= 2013AP000500&cacheId=1871E800E811C3B44A95EE 3DC04CC813&recordCount=1&offset=0&linkOnlyToF orm=false&sortDirection=DESC.
2 Some claims-made policies contain a grace period or tail coverage that allows the insured anywhere from 30 to 90 days to report a claim after expiration of the policy period. It does not appear that the 2009-2010 WILMIC policy contained an extended period to report a claim.
3 Certain words that appeared in bold in the policy, which reflect a defined term, are not bolded in this Article.
4 Wisconsin Stat. § 632.26(1)(b) provides that all liability insurance policies must state that failure to give notice during the time required by the policy does not invalidate a claim as long as the insured shows it was not reasonably possible to give notice within the prescribed time and that notice was given as soon as reasonably possible. Under § 632.26(2), the failure to provide notice as required by the policy as modified by para. (1)(b) does not invalidate the claim absent a showing of prejudice.
5 See PAJ, Inc. v. The Hanover Ins. Co., 243 S.W.3d 630, 636 (Tex. 2008).
6 Id.; see also 20 Eric Mills Holmes, Holmes’ Appleman on Insurance § 130.1(a)(1) (2d ed. 2002); 1 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 1.5 (3d ed. 2008).
7 See, e.g., Charles T. Main, Inc. v. Fireman’s Fund Ins. Co., 551 N.E.2d 28, 29 (Mass. 1990); PAJ, 243 S.W.3d at 636; see also 13 Couch on Insurance 3d § 1.5 (citing to various cases).
8 The Aul court cites to Lexington Insurance Co. v. Rugg & Knopp, Inc., 165 F.3d 1087 (7th Cir. 1999), as its sole support for applying the Notice-Prejudice Statutes to claims-made policies. The citation to Lexington is not reliance on Wisconsin law given that Lexington is a Seventh Circuit case in which the court was predicting how the Wisconsin Supreme Court would decide the issue. Lexington also suffered from much of the same truncated analysis present in Aul. Moreover, the Seventh Circuit failed to consider cases such as Charles T. Main and others that directly dealt with similar Notice-Prejudice Statutes in which courts concluded that such statutes did not apply to claims-made policies.
9 Gerald Kroll, The “Claims Made” Dilemma in Professional Liability Insurance, 22 U.C.L.A L. Rev. 925, 928 (1975).
10 20 Holmes’ Appleman on Insurance 2d § 130.1(a)(1).
12 For those insureds concerned that such an outcome leaves them with little option to report a claim within the policy period, it should be noted that most claims-made policies contain a provision which allows the insured to report a potential claim (often referred to as a potentially compensable event, or PCE) during the policy term that will be treated as a claim made within the policy period if an actual claim is later made against the insured.
13 See Gulf Ins. Co. v. Dolan, 433 So. 2d 512 (Fla. 1983); City of Harrisburg v. Int’l Surplus Lines Ins. Co., 596 F. Supp. 954 (M.D. Pa. 1984); Prodigy Communications Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.2d 374 (Tex. 2009); Esmailzadeh v. Johnson & Speakman, 869 F.2d 422 (8th Cir. 1989).
14 Gulf Ins. Co., 433 So. 2d at 515-16 (emphasis in original).
15 See supra note 13.
16 See, e.g., T.H.E. Insurance Co. v. P.T.P. Inc., 628 A.2d 223, 230-31 (Md. 1993) (also citing to various other cases in which similar statutes were rejected as applied to claims-made policies); Charles T. Main, 551 N.E.2d at 29; Zuckerman v. Nat’l Union Fire Ins. Co., 495 A.2d 395, 406 (N.J. 1985); DiLuglio v. New England Ins. Co., 959 F.2d 355, 359 (1st Cir. 1992).
17 551 N.E.2d at 30 n.2 (quoting Mass Gen. Laws. ch. 175, § 112 (1987)).
18 Id. at 30.
20 628 A.2d at 230-31 (holding that notice-prejudice provisions of the statute did not apply to the insurer’s denial of coverage under the claims made liability policy for a claim made and reported after the policy period had expired).
21 See Aul, 353 Wis. 2d 238, ¶ 14.
22 Id., ¶ 6.
23 Id., ¶ 14.
24 See supra note 1.