Notice to Insurer Concerning “Claims Made” Insurance Policy

McCabe v. St. Paul Fire & Marine Ins. Co. (Motion for leave to appeal granted May 3, 2011) 79 A.D.3d 1612 (4th Dept. 2010)

Has the Fourth Department determined that an insurer regarding a “claims made” insurance policy need not receive a report of a claim during the policy period or extended reporting period, as long as there is a reasonable excuse for the late report outside of those time periods? The Fourth Department’s decision in McCabe raises that exact point.

In McCabe, the plaintiffs Amy and Thomas McCabe were the owners of a residence that was totally destroyed by fire on December 30, 2003. They retained attorney David E. Fretz to handle their fire loss claim under their homeowner’s policy. During the course of that representation, Fretz began to suffer from severe depression and thus became unable to handle his own and the plaintiffs’ business and legal affairs. As a consequence of Fretz’s neglect of their insurance claim, the plaintiffs lost their ability to recover on that claim.

The plaintiffs commenced a declaratory judgment action seeking a declaration that Fretz’s professional liability insurer, defendant St. Paul Fire & Marine Ins., is obligated to indemnify Fretz in the underlying legal malpractice action the plaintiffs brought against Fretz. Fretz’s malpractice insurance policy was a “claims made” professional liability insurance policy, which required that any claims must be reported to the insurer within the policy period and the extended reporting period.

The insurer first learned of the plaintiffs’ claim against Fretz on June 22, 2007, approximately three months after the extended reporting period for the “claims made” policy expired. It disclaimed coverage for Fretz based on the untimely notification. The plaintiffs obtained a default against Fretz in the underlying action and, following an inquest, Supreme Court awarded the plaintiffs $226,000 in compensatory damages. The plaintiffs then commenced the declaratory judgment action against the insurer in an attempt to recover the compensatory award they received in the underlying action.

The Fourth Department concluded that the plaintiffs’ claim was not invalidated even though they failed to give notice to Fretz’s insurer during the policy period or extended reporting period. In reaching its conclusion, the court noted that the plaintiffs gave the insurer notice of their claim against Fretz as soon as reasonably possible. The court rejected the insurer’s contention that Insurance Law sections (a)(3) and (4) included exceptions for claims made insurance policies.

Those sections of the Insurance Law concern what is deemed notice and whether giving that notice as soon as reasonably possible suffices under insurance policy notice conditions. They generally apply to occurrence-based insurance policies. The Court of Appeals will decide whether notifying an insurer as soon as reasonably possible within the context of a claims made policy is sufficient. If the court affirms the Fourth Department’s holding, insurers of claims made policies will not have the same closure that they once had after the reporting period and extended reporting period expires.