Medical Liability Claims-Made Policies

Challenges to the Notice Requirement

Medical malpractice liability insurance policies, like most professional liability insurance policies, are typically “claims-made” policies. While there are variations, claims-made policies generally provide coverage only for those claims that are made during the policy period notwithstanding when the claim arose, provided the claim also meets all other coverage requirements.

In contrast, most policies covering liability outside of the realm of professional liability are “occurrence” policies, which provide coverage for an “occurrence” that happens during the policy period, irrespective of whether the claim arising out of the occurrence is made during or after the policy period.

In short, the difference between the two types of policies is that for an occurrence type insurance policy, the occurrence triggers coverage, whereas in a claims-made policy, the notice or making of the claim constitutes the event triggering coverage.

Claims-made policies were created primarily due to the fact that the discovery of professional negligence and/or the realization of damages resulting from professional negligence typically occur a substantial period of time after the act of negligence itself. This creates the possibility of claims arising long after the policy period has expired, thus increasing the difficulty in evaluating the risks of a loss. Courts and insurers also found it problematic to decide whether the date of the alleged negligence, the date of discovery of the alleged negligence or the date of the injury caused by the alleged negligence was operative to determine insurance coverage. [See Kroll, The Professional Liability Policy: “Claims-Made,” 13 Forum 842, 843 (1978).]

The Determinant Factor

Claims-made policies resolved these difficulties by establishing the date when the claim is made as the determinant factor for coverage. When an insurer first issues a claims-made policy to a new insured, the policy usually contains a “retroactive period” which, in effect, provides that the policy will not cover a claim even though made during the policy period if the underlying act of negligence occurred prior to the retroactive date set forth in the policy. The retroactive period places some limit on the potential claims that might be covered.

There are also other variations on the notice requirement of claims-made policies. For example, some policies require that the claim not only be made but also reported to the insurer during the policy period. Claims-made policies may also contain “savings” clauses that typically provide that claims made during a certain period of time after expiration of the policy period will be deemed to have been made during the policy period if the insured gives timely notice of the facts or circumstances underlying the claim to the insurer.

Courts have noted that claims-made policies “work perfectly,” so long as an insured who is covered under a retroactive date clause in his initial policy continues to purchase successive policies from the same insurer. However, problems can arise when the insured changes insurers or does not renew the policy. These circumstances can lead to a claim for which there is no coverage.

Not surprisingly, when coverage is denied, the insured searches for reasons to invalidate the notice requirement of the claims-made policy as the event triggering coverage. Typically, these arguments are based on the contention that claims-made insurance policies violate public policy. However, courts in most states have rejected public policy arguments against claims-made policies. [Hand-book on Insurance Coverage Disputes, §4.02(b) (Aspen Publishers, 14th Ed. 2008)]

The Louisiana Experience

Consistent with this trend, Louisiana’s Supreme Court has long held that claims-made policies do not per se violate public policy. [Livingston Parish School Board v. Fireman’s Fund American Ins. Co., 282 So. 2d 478 (La. 1973); Anderson v. Ichinose, 760 So. 2d 302 (La. 1999)]

Unique among most other states, Louisiana permits an injured third party to sue an insurer directly under the Direct Action Statute, L.R.S. 22:655, which states that the public policy in Louisiana that liability insurance is issued primarily for the protection of the public and confers substantive rights on third-party tort victims that are vested at the time when an injury occurs.

Injured third-party claimants have argued that the notice requirements of claims-made policies violate public policy in those circumstances where the negligent act occurs during the policy period but the resulting claim is made after the policy period expires.

The Louisiana Supreme Court has specifically rejected this argument, holding that the Direct Action Statute does not “extend the protection of the liability policy to risks that were not covered by the policy or were excluded thereby (at least in the absence of some mandatory coverage provisions and other statutes).” [Anderson v. Ichinose, 760 So. 2d 302, 307 (La. 1999)]

Another challenge specific to claims-made policies providing coverage for medical malpractice was that the no-tice requirement in the medical liability claims-made policies violated L.R.S. 40:1299.45, which prohibits cancellation of medical malpractice insurance policies to the extent the cancellation affects “any claim that arose against the insurer or its insured during the life of the policy.”

Thus, it was argued that if the claim for medical malpractice arose from professional negligence occurring during the policy period, L.R.S. 40:1299.45 precluded denial of coverage on the basis that the claim was made or reported after the policy period had expired. In considering this argument, the Louisiana Supreme Court noted that the case involved a claim that had been made and reported after the policy at issue had expired by its own terms. Drawing a distinction between cancellation and expiration, the Court noted that L.R.S. 40:1299.45 concerned the cancellation of policies, and, because the policy at issue was not cancelled, the statute was not applicable. [Anderson v. Ichinose, 760 So. 2d 302 (La. 1999)]

Recently, the Louisiana Supreme Court was presented with another public policy challenge to the validity of the notice requirement in a case in which it was argued that a claims-made policy the required the claim to be made and reported to the insurer within the policy period violated L.R.S. 22:629, which prohibits any provision in an insurance contract that limits a right of action against the insurer to a period of less than one year from the time when the cause of action accrues. The argument was made that because the policy period of the claims-made policy at issue was for only one year, the requirement that the claim must be made and reported during the policy year had the effect of reducing the right of action against the insurer to a period of less than one year because the claim would, and in that case was, made and reported after the policy period had begun.

The Court rejected this argument and affirmed that claims-made policies are not per se impermissible or against public policy. With respect to L.R.S. 22:629, the Court stated that while the statute might prohibit any clause from limiting a right of action against an insurer to less than one year, it did not mandate coverage where none was found. A claims-made policy provides the scope of coverage bargained for by the parties, the Court found, but does not limit the plaintiff’s right to sue the insurer. The Court concluded that “to hold otherwise would effectively convert a claims-made policy into an occurrence policy and change the bargained-for exchange between the insurer and the insured.” [Hood v. Cotter, _ So. 2d _, 2008 WL 5146659 (La. 2008)]

A Louisiana appellate court, however, was recently presented with the situation where a claim arose during the policy period but was not made until after the policy had been cancelled due to non-payment of premiums. Relying on the distinction between expiration and cancellation noted previously by the Louisiana Supreme Court, the appellate court held that the requirement that the claim be made during the policy period violated the mandate of L.R.S. 40:1299.45 that a cancellation of a policy “shall not” affect any claim arising during the life of the policy. Presented with the clear cancellation of a policy, the court determined that L.R.S. 40:1299.45 was applicable, even though the cancellation was for failure to pay premiums, and invalidated the notice requirement, rendering the insurer liable for the claim. [Joiner v. Taylor, _ So. 2d _, 2009 WL 365109 (La. App. 1st Cir. 2009)]

One Exception

Louisiana courts have made it clear that claims-made policies are not per se against public policy and have rejected most challenges to the notice requirement. At present, the one exception is that when a claims-made policy is cancelled before the policy period expires it appears that the policy will be required to cover any claims arising out of those acts or omissions that occurred within the policy period prior to the effective date of the cancellation. In this circumstance, the claims-made policy is effectively converted to an occurrence policy.

Topics Carriers Claims Louisiana Professional Liability