Reach for the Stick: Why Dynamite is Less Dangerous Than "Claims Made & Reported" Policies
REACH FOR THE STICK: WHY DYNAMITE IS LESS DANGEROUS THAN “CLAIMS MADE & REPORTED” POLICIES
By David A. Gauntlett[*]
Dynamite is inherently risky and should be treated with kid gloves. Nitroglycerin, an element, within the dynamite is susceptible to shock and so must be handled with extreme caution and care.[2] Compared to dynamite, “Claims-Made-and-Reported” policies include a number of traps for the unwary policyholder that if not mindful can result in major losses.
Cases in Point: The Unpredictability of “Interrelated Wrongful Act” Provisions
Typical “related claims and provisions” are used by insurers to broadly define related claims into a single claim. For example, in a recent case set before the US District Court in Connecticut, the court ruled in favor of the insurer who argued that the “related claims” exclusion applies to claims that “arise out of” or “result from” a previous claim.[3] That court found the confluence of the terms “arising out of” and “common nexus” precluded defense benefits where the interrelationship between a prior and subsequent actions are “based upon” the issues and conveyance of the same initial claim.
A somewhat narrower claim is still problematic as language that calls “common nexus” depends on what arises to indicate a causal connection but the term that arises out of must be narrowly included. [4] A causal connection can be sufficiently determined by showing a subsequent claim 'was connected with,' 'had its origins in,' 'grew out of,' 'flowed from,' or 'was incident to' a prior claim.[5]
Treacherous Policy Applications and Notice Provisions That Are Traps for the Unwary
Where an initial lawsuit is brought by an individual, for example, and subsequently expanded to a class action lawsuit, a subsequent case brought by another employee regarding a different employment activity should not fall within the scope of the relation.[6] A mere “typological relations” such as similar act or offender, do not constitute “related claims.”[7]
In employment coverage disputes it is not uncommon for an EEOC claim to be submitted by a disgruntled employee which is not sent to the employer. A subsequent EPLI policy application, either freshly pursued or “upon renewal”, may not reference such an EEOC claim. But, a subsequent lawsuit brought within 1 year of the EEOC claim may directly reference the EEOC claim in reference to an event predating the asserted wrongful “employment act”. A policyholder who can test a denial of coverage based on a purported “prior act” can legitimately assert that no statement in the policy application was inaccurate or even incomplete but still run afoul of an endorsement which seeks to limit its right to secure policy benefits. [8] An Insurer who only cites portions of the Policy, does not analyze contrary authority, and relies on an overbroad construction of exclusionary language, is in breach of the duty of good faith and fair dealing. Where an EPLI policy includes a “Related Party Exclusion”[9] it is superseded by a contemporaneously, but later numbered endorsement[10] for a “retroactive date”. [11]
Maintaining Coverage Following the Sale of a Business
Policyholders selling business have a choice to either cancel policies flat or purchase a tail. Any choice other than a tail purchase is problematic. Where there is no evidence, the trigger of coverage duties will not arise. An expired policy will not permit access to or an ability for an insured who has cancelled the policy to obtain any benefits they are under. Typically, “notice of circumstance” may address a problem that comes to the attention of an insured that may not lead to a lawsuit in the policy period, where, an insured is not aware the only remedy available to the seller is to either have secured a tail or provide coverage for claims made during the policy period following the sale that would encompass actions (i.e. employing a retroactive date). Where there is a policy, a report of a claim within that period would suffice, this also includes a report of a “notice of circumstance.”[12]
In light of such language a decision to flat cancel a policy to secure a minimal return premium on cancellation and thereby eviscerate any protection arising out of the sale of the business for a claim brought by the buyer is shortsighted. The better tactic, at minimum, is to keep the existing policy enforced. For a better approach, is to purchase a tail that is an “extended reporting period” opportunity to address any claims that arise out of the sale of the business that can benefit from the insurance previously in place for that entity. This is especially important when the business operations of that sold entity are not continued in a distinct entity.
Conclusion
An insurance broker that does not recommend any of the above strategies relying on the fact that the business is no longer owned by the seller under sources available insurance coverage that best protects against claims that may arise in connection to the sale of the business.
Claims-Made-and-Reported policies create a host of issues that require proactive policyholder oversight. Policyholders must be vigilant about the particularities of their policy language to ensure knowledge of when actions need to be undertaken and the facts necessary to properly make use of their policy.
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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[2] See, (Accessed Sept. 8, 2021) NobelPrize.org, Nobel Prize Outreach AB 2021: Nitroglycerin and Dynamite
[3] Alexbay LLC v. QBE Insurance Corp, 486 F. Supp. 3d 511, 514-516, 527 (D. Conn. 2020) (The two cases were deemed “related claims” under a “common nexus” and “arose from” policy language. Both cases challenged the same conveyance of shares from an associated company and the issues addressed by a lawsuit regarding the determination of the “commercial reasonableness of accepting collateral to satisfy unpaid debts.”)
[4] My Choice, LLC v. Travelers Cas. Ins. Co. of Am, 823 Fed. Appx. 510, 512 (9th Cir. (Cal.) 2020). (“Applying the "arising out of" exclusionary language to the allegations asserted in the Trusted Tech cross-complaint runs counter to the principle that. . . exclusionary clauses are interpreted narrowly against the insurer.")
[5] Misiti, LLC v. Travelers Prop. Cas. Co. of Am, 308 Conn. 146, 159, 164 (1998) (A fence collapsed on a tavern customer causing her to injure herself when she fell evidencing, “an accident or injury...connected with, [having] its origins in, [growing] out of, [flowing] from, or incident to the risk insured against” demonstrating “a causal connection.”)
[6] Home Ins. Co. v. Spectrum Info. Techs, 930 F. Supp. 825, 850-851 (E. D. N.Y. 1996) (A restatement of earnings was distinct from conspiracy allegations based on employees’ specific acts were insufficient in and by themselves to further the larger scheme to artificially inflate company prices.)
[7] Lafayette Life Ins. Co. v Arch Ins. Co, 784 F. Supp. 2d 1034, 1044 (D. N. Ind. 2011) (Twelve claims arose against a life insurance company agent for allegedly deceiving insureds “into spending more money to swap or buy life insurance policies” were deemed distinct in character enough that their “typological relations” were not enough to make “the claims”…all one in the same.)
[8] Wilson v. 21st Century Ins. Co, 42 Cal. 4th 713, 724 (2007) ([F]ailing to evaluate a claim objectively is evidence of bad faith such as when insurer searches for ways to deny coverage while ignoring evidence in file that supports the claim.”)
[9] See, Mount Vernon Fire Insurance Company EPLI coverage, EPL-110, Endorsement 3 provided: “The Company shall not be liable for any Claim brought by or against any Insured based upon, arising out of, directly or indirectly resulting from, in”
[10] See, Mount Vernon Fire Insurance Company EPLI coverage, EPL-148, Endorsement 5 provided: “Coverage shall apply to any Claim made against the Insured for Wrongful Acts committed prior to the expiration date of this policy or the effective date of the cancellation or nonrenewal of this Policy.”)
[11] Minuteman Int’l, Inc. v. Great Am. Ins. Co. No. 03 C 6067 LEXIS 4660, at *24 (N.D. Ill. 2004) (“Similarly, if there are two inconsistent endorsements and one endorsement is subsequent to the other endorsement, the later endorsement generally will control.”)
[12] See e.g., Hudson Insurance Co. Directors, Officers and Company Liability Coverage § I.(A) (“The Insuring Agreement’s requires that a claim must be “first made against the insured during the Policy Period” The Policy provides that the claim is “deemed to have been first made at the earliest date of receipt by the Company, Insured Person or their agent of a written demand against such Insured Person or the Company.”)