Reporting Requirement of a Claims Made Policy is a Condition Precedent

Posted on September 3, 2021 by Barry Zalma

Insureds Try Creative Analysis of Policy and Fail

Day Kimball Healthcare, Inc. and Erica J. Kesselman appealed from the judgment of the United States District Court for the District of Connecticut (Dooley, J.) dismissing their complaint that sought a declaratory judgment directing Allied World Surplus Lines Insurance Company and Steadfast Insurance Company to indemnify plaintiffs pursuant to their respective insurance policies in connection with an underlying medical malpractice lawsuit. In Day Kimball Healthcare, Inc., Erica J. Kesselman, M.D. v. Allied World Surplus Lines Insurance Company, Fka Darwin Select Insurance Company, Steadfast Insurance Company, No. 20-3803-cv, United States Court of Appeals, Second Circuit (August 27, 2021) the Second Circuit Refused to rewrite a policy to provide coverage for slothful insureds.

FACTS

Day Kimball is the hospital where Kesselman practices obstetrics. Day Kimball has a primary insurance policy through Lexington Insurance Company that covers a variety of liabilities, including professional liability coverage for medical malpractice claims and employee benefit claims (the “Lexington Policy”). Plaintiffs also contracted for excess coverage from both Allied World and Steadfast. Both plaintiffs were sued in Connecticut state court for medical malpractice, and Lexington is providing a defense in that action.

The Allied World policy is made up of three insurance agreements (“Insuring Agreements”): As relevant Insuring Agreement A provides excess coverage to the Lexington Policy for professional liability claims. It is a “claims-made and reported policy,” and the parties agree that plaintiffs failed to provide Allied World with timely notice of the malpractice claims. Allied World refused to provide excess coverage on the ground that the claim was untimely, and Steadfast, which follows form with the Allied World policy, denied coverage on the same basis. Because they were not able to access coverage through Insuring Agreement A, plaintiffs tried to obtain coverage for their malpractice under Insuring Agreement C, which provides excess coverage for claims related to employee benefit programs.

ANALYSIS

Connecticut law like most states requires that an insurance policy is to be interpreted by the same general rules that govern the construction of any written contract and enforced in accordance with the real intent of the parties as expressed in the language employed in the policy and the policy words must be accorded their natural and ordinary meaning. The court must look at the contract as a whole, consider all relevant portions together and, if possible, give operative effect to every provision in order to reach a reasonable overall result.

The Second Circuit concluded that the district court correctly dismissed the complaint. Insuring Agreement C unambiguously provides excess coverage to the Lexington Policy only for claims related to employee benefit programs. Insuring Agreement C states plainly that it is “in excess of the Applicable Underlying Limit for the insurance identified in Items 3 and 4,” and that the “terms and conditions of such Scheduled Underlying Insurance are, with respect to this Insuring Agreement C., made a part of this Policy. The underlying policy’s employee benefits coverage provides coverage for alleged wrongful acts committed “while acting solely within the administration of your employee benefit programs.”

Such programs include “[g]roup life insurance, group accident or health insurance, profit sharing plans, pension plans, employee stock subscription plans, workers compensation, unemployment insurance, social security benefits, disability benefits ….” The underlying litigation is a medical malpractice action that clearly implicates only the professional liability coverage and has no relationship to the benefit programs.

The Schedule of Underlying Insurance specifically and unambiguously identifies, among other attributes, the type of coverage and the underlying policy to which each item refers.

Plaintiffs, unwilling to give up, also asked the court to allow them to seek coverage under the Steadfast policy, which is excess to both the Lexington and Allied World policies, and follows form with those policies. Plaintiffs argue that because they are entitled to coverage under the Allied World policy pursuant to Insuring Agreement C, they are entitled to coverage under the Steadfast Policy.?Plaintiffs are wrong about their right to coverage under Insuring Agreement C, and thus are also incorrect about their entitlement to coverage under the Steadfast policy.

Finally, at oral argument before, defeating their creative arguments, the district court, plaintiffs asserted that the maintenance provision left Steadfast liable under Insuring Agreement C, not Insuring Agreement A, affirmatively agreeing that Insuring Agreement A was “no longer in play.”

The Second Circuit Court of Appeal concluded that the plaintiffs’ argument relating to the maintenance provision and Insuring Agreement A was forfeited and refused to interpret a clear and unambiguous policy to provide coverage for malpractice defense and indemnity from a coverage that only covers allegations of wrong doing in an employee benefit plan.

ZALMA OPINION

Although creativity in litigation and coverage analysis is to be commended it should not be honored when, as in this case, it should be sanctioned and the Second Circuit should be honored for not falling for the attempt to change a employee benefit coverage into a malpractice defense and indemnity coverage. Creativity is one thing. Trying to escape the insureds’ own sloth and change a coverage from what it was clearly intended to do into something else is ridiculous.

? 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at https://www.zalma.com and [email protected]. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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