Insurance policies almost universally require that the insured immediately report any claim made against the insured. In the context of liability policies written on an “occurrence” basis (generally, policies where coverage is triggered at the time of an accident, no matter when the lawsuit is eventually filed by the plaintiff injured in that accident), late notice to the insurer under Oregon law does not destroy the insurer’s duty to defend and cover a loss unless the late notice somehow prejudiced the insurer. See, e.g., Employers Ins. of Wausau v. Tektronix, Inc. (Or. Ct. App. 2007) (refusing to hold that a 12-year delay was prejudicial).

But a recent California case follows a far stricter rule where the policy was issued on a “claims made and reported” basis, which is how most professional-liability (or “errors and omissions”) policies are written. In Alterra Excess & Surplus Ins. Co. v. Gotama Bldg. Engineers, Inc. (C.D. Cal. July 24, 2014), Gotama, an engineering firm, had purchased two one-year policies with policy periods beginning on June 1, 2012 and, for the renewal, on June 1, 2013. Both were written on a “claims made and reported” basis, which provides liability coverage where a “Claim first made against the Insured during the Policy Period…and reported to the Underwriters either during the Policy Period [or] within sixty (60) days after the expiration of the Policy Period.” And a “Claim” in the policies means a “written demand for monetary damages, services or non-monetary relief” or a “civil proceeding commenced by service of a complaint, indictment or similar proceeding.”

Another party’s lawyer sent a letter to Gotama’s lawyer on April 24, 2013 — only about a month before the end of the first policy period on June 1, 2013 — to demand that Gotama “acknowledge its responsibility” for problems at a construction project and “put its carriers on notice of these claims.” For reasons not explained in the opinion, Gotama did not report this “claim” (or a lawsuit filed on August 23, 2013) to its insurer until January 13, 2014. This delay gave its insurer a get-out-of-jail-free card: no defense, no indemnity, no coverage at all.

Happenstance plays an outsized role in these policies, as demonstrated by this case. Gotama’s delay in reporting the letter was about nine months. So, if Gotama had received the letter near the beginning of its policy period, just a little over a month later, the insurer would have had a much tougher argument to elude coverage (that is, it would have been reported within the policy period, even if not right away). But since the “claim” rolled in near the end of the policy period, the same nine-month delay dispositively won the day for the insurer, without having to show any prejudice or detriment at all.

Insureds with any whiff of a “claim” (in other cases, whether the insured received a “claim” has been far less clear) should err on the side of reporting early, and reporting often. Other cases, in fact, have found no coverage for very small delays of even a few days after the expiration of the reporting period. It can be a brutal and unfair situation for insureds.

The general rationale for refusing to recognize the “notice prejudice rule” in cases involving claims-made-and-reported policies gives undue weight to the insurer’s underwriting needs and makes an artificial, meaningless distinction between “creating” coverage and losing it in the reporting of a claim. There is no controlling Oregon case on this issue, but the Ninth Circuit, in an unpublished opinion, has predicted that Oregon law would not require the insurer to show prejudice for a late-reported claim. Oregon Sch. Activities Ass’n v. Nat’l Union Fire Ins. Co. (9th Cir. 2008).

Accordingly, whether Oregon law will ultimately abandon the “notice prejudice rule” for some policies is an open question — but not one that any insured would relish facing. Rather, careful insureds and their lawyers should read Gotama as a warning to report a “claim” even where it is not evident that a “claim” has truly yet been asserted.

Opinion reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, please visit www.next.westlaw.com.