Under typical Commercial General Liability policies, which are triggered by an “occurrence” during the policy period, an insured can safely wait until being served with a complaint to notify the insurer about the litigation. But policies written on a “claims made” basis, such as many Errors and Omissions policies or Employment Practices Liability policies, raise the specter of forfeiting any coverage at all for not notifying the insurer of a “claim” long before the insured knew that it would have to lawyer up and defend against a lawsuit.
Scottsdale Indemnity Co. v. Convercent, Inc., a recent decision from the federal court in Colorado, demonstrates this risk and the hole that an insured can inadvertently dig for itself. In this case, Convercent (a company that makes “ethics and compliance” software for businesses) notified Eugene Ferraro in October 2015 that it was going to sack him in January 2016.
Ferraro did not take this news well. He wrote a letter on October 20 to accuse the company of breaking its employment promises and violating federal age-discrimination laws, asking that Convercent “reconsider the decision to terminate my employment because of my age or any unjustified or unlawful reason” and threatening to “pursue all appropriate remedies against everyone involved” if his salary and benefits were “interrupted” in January. Convercent apparently ignored the letter, so Ferraro wrote another one in December, which the company also ignored. (Spoiler alert: nothing was said about Ferraro’s letters to Scottsdale, Convercent’s “Employment Practices Coverage” insurer.) Ferraro was terminated on January 4, 2016.
Now the rub: Convercent purchased a renewal policy with Scottsdale on May 30, 2016, still without any notice about Ferraro’s noisy exit months earlier. This silence wasn’t broken until Ferraro filed a charge of discrimination with the EEOC on August 5, 2016, which recycled the allegations from the October 2015 letter and which Convercent notified Scottsdale about on August 29, 2016.
Convercent assumed that the “claim” for which it wanted coverage was started by the August 5 filing, and that it would be covered under its in-force policy renewed three months earlier. But Scottsdale denied coverage under this policy because Ferraro’s letter in October 2015, which was sent even before he was shown the door three months later, established when the “claim” was first made against Convercent. Under “claims made and reported” policies like Scottdale’s, the claim must be made against the insured and reported during the same policy period. If not, no defense, no indemnity, no protection for premiums long ago paid.
The judge agreed with Scottsdale. Because Ferraro wasn’t even fired yet, his letter was not the classic “written demand against an Insured for damages or other relief” that usually leads to notice to the insurer and getting defense lawyers on board. But in this case, just the implied threat of litigation was enough to make Ferraro’s letter a “claim” against Convercent:
Mr. Ferraro’s letter contained enough information to put defendants on notice of his willingness to litigate the matters he raised if a settlement was not possible. Defendants were thus given fair warning of Mr. Ferraro’s complaints and of the fact that he would likely sue if his requests were not addressed. The absence of an attorney was not a legitimate reason for defendants’ ignoring Mr. Ferraro’s requests or failing to see his letter for what it was: a demand for relief.
This “fair warning” provided by Ferraro’s letter cuts twice: First, the letter was a “claim” made in October 2015, which had to be reported before the original policy expired in May 2016. This wasn’t reported by the renewal, so Scottsdale owed no coverage under that policy. Second, the court found that the claim was “later reasserted” in the EEOC filing in August 2016, which meant no coverage under the renewal policy either. Under this very generous view of what constitutes a “claim,” insureds must notify their insurers if there is even the whiff of a lawsuit in the air.
Readers of this blog will remember other traps in claims-made coverage like omitting notice of a “circumstance” in a renewal application, or buying policies with “retroactive” dates later than a claim. Policies written on a “claims made” basis simply don’t fit very well with how most insureds think about insurance coverage. Careful business owners will consult with coverage counsel long before defense lawyers have to be hired in responding to a claim.
The opinion linked to this article was 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.