Understanding Varying Claim Definitions

Understanding Varying Claim Definitions

The vast majority of professional liability/errors and omissions policies are “claims made”, meaning that the trigger of coverage under such policies is the making of a claim.  While the definition of “claim” varies to some degree, it typically includes language to the effect being “a demand for money or services”.  A recent Illinois Appellate Court provides a useful discussion addressing a similar policy definition.

In James River Ins. Co. v. TimCal, Inc., a homeowner insurer paid almost $500,000 for a fire loss where the policy applicant answered “no” to whether the dwelling was a multi-family structure and housed boarders.  It was discovered that the dwelling in fact contained 2 separate units with 4 tenants and, by letter dated July 9, 2012, the insurer sought to hold the producer responsible for the damages it paid for the fire for violating the producer agreement.  The insurer stated in the letter that “we have been damaged”, “we will seek to recover these damages from you”, and “the damages are presently reserved at $576,500.”  The claim was not submitted by the agent to its E&O carrier until April 2013 when the homeowner insurer wrote to the agent’s E&O insurer directly, this time specifying damages to the amount paid, and the agent also emailed the E&O insurer advising it had a “claims related question”. The Court found that the July 2012 letter was unambiguously a claim even though it did not specify a settlement demand or the total amount of actual damage and, that as a result, the 9 month delay was untimely.

The knowledge of an insured as a basis for a carrier to deny coverage is not limited to policy conditions.  In this connection, most applications ask if a prospective insured is aware of a fact or circumstance that could give rise to a claim.  Moreover, many professional liability policies contain exclusionary language that precludes coverage if an insured has knowledge of an act that may be the basis for a claim prior to policy inception.  This type of policy exclusion was recently the focal point of a Florida Federal District Court decision.

In David R. Farbstein v. Westport Ins. Co., an attorney was sued with respect to a real estate transaction that closed prior to the inception of the legal malpractice policy in which it was alleged the attorney failed to include in the sales contract that the purchaser would assume the existing mortgage with a pre-payment penalty. Of particular importance, it was also alleged that the client went ahead with the closing based on the attorney’s advice to avoid being sued for specific performance.  As a result, the client incurred the $482,604 pre-payment penalty. The Court concluded that the professional liability carrier properly denied coverage based on the policy’s “prior knowledge” exclusion.  Specifically, the Court found that the attorney could have reasonably foreseen that the alleged error might give rise to a claim as of the date of the closing, which was prior to the inception of the legal malpractice policy.

One valuable lesson from these decisions for a professional (insurance, legal or otherwise) is that he or she is viewed as a “sophisticated” insured capable of understanding contractual obligation.  In both of these cases, the Courts found the policy language at issue unambiguous.  I suspect another set of facts involving a layperson may lead to a different result.

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