Claims-made policies were created to bring more certainty to the insurance relationship. The policies apply generally to claims that are incurred and reported during the policy period or any extended reporting period. If the claim is not reported on time, there is no coverage.
This contractual result often clashes with statutory provisions, like that in New York, which preclude an insurance company from avoiding its obligations because of late notice of claim unless there is prejudice. See N.Y. Ins. Law § 3420(a)(5). In a recent decision, a New York intermediate appellate court made it clear that a claims-made policy still requires timely notice.
In Certain Underwriters at Lloyd’s London v. Advance Transit Co., Inc., No. 2020-02560 (N.Y. App. Div. 1st Dep’t Nov. 17, 2020), the appellate court affirmed summary judgment in favor of the insurer under a claims-made and reported policy. The motion court held that the insurer had no obligation to defend or indemnify the insured, could withdraw its defense of the insured in the underlying action and could seek reimbursement from the policyholder for fees and expenses paid in that defense.
The appellate court affirmed noting that Section 3420(a)(5) provided a “however” when it came to claims-made policies.
. . . a claims-made policy can set a definite time frame for reporting claims, irrespective of prejudice, which can include “the policy period, any renewal thereof, or any extended reporting period.” The use of the disjunctive “or” provides that the claim shall be made during the policy period, or the renewal, or any extended reporting period.
Here is what the statute provides:
With respect to a claims-made policy, however, the policy may provide that the claim shall be made during the policy period, any renewal thereof, or any extended reporting period, . . .
Based on the plain reading of the statute, a review of legislative history, and the facts, the court held that because the policyholder reported the claim to the insurer outside the policy period and the extended reporting period, the claim was untimely.
The court also upheld the motion court’s determination that the insurer could seek reimbursement for the cost of defense. The court pointed to the insurer’s reservation of rights letter, which stated that the insurer reserved the right to to recover all payments, including costs and expenses of defense. As the court stated, “New York law further permits insurers to provide their insureds with a defense subject to ‘a reservation of rights to, among other things, later recoup their defense costs upon a determination of non-coverage.'” (citation omitted).
While the notice-prejudice rule provides some relief to policyholders where late notice has not prejudiced the insurer, under a claims-made policy, timely notice is still required. Otherwise, it would not be a “claims-made” policy.