Reporting Claims and Circumstances in Claims-Made Policies
June 30, 2008
When an insured under a claims-made policy becomes aware of an event that could give rise to a claim, is he or she obligated to report it to the insurer? If no obligation exists, is there any advantage or disadvantage to reporting the event to the insurer? Two recent cases illustrate that the answers to these questions entail both a careful reading of the policy in question and a careful consideration of the consequences that could result.
Under a claims-made policy, coverage is only triggered when a claim against the insured is made, and not when the event giving rise to the claim occurred. Some claims-made policies, however, also require an insured to report to the insurer any accident or occurrence that could give rise to a claim. The Supreme Court of Canada reviewed the effect of such a requirement in Jesuit Fathers of Upper Canada v. Guardian Insurance Company.
In Jesuit Fathers, the insured informed the insurer of a number of events that had occurred — during the policy period — out of which claims could arise. Subsequently, the insurer refused to renew the policy. After the policy’s expiration, the insured made numerous claims based on the reported events.
The court determined that a claim at common law requires a third party to communicate the intention to hold the insured responsible for damage. The court held that as a duty to defend arises "when the underlying complaint alleges any facts that fall within the coverage of the policy," no duty arose with respect to claims made after the policy period. In other words, despite the insured’s obligation to report accidents and occurrences, the policy did not cover these until a claim by a third party was in fact communicated to the insured, and hence no duty to defend arose for the claims communicated after the policy’s expiration.
A related issue was examined by the recent B.C. Court of Appeal decision in MWH International, Inc. v. Lumbermens Mutual Casualty Company. In that case, the policy defined a "claim" as a "demand received by the insured for money or services," but included an endorsement that expanded the definition of claim to include a "circumstance." "Circumstance" was defined as "an event reported during the policy period from which the insured reasonably expects that a claim could be made." The issue that arose was whether the insurer was obligated to reimburse the insured for legal fees expended to protect the insured’s interest after the occurrence of an event out of which a claim could arise.
In determining that the insurer had no obligation to defend the insured, the majority decision looked to the wording of the policy, which required the insurer to "defend any claim against the insured seeking damages to which this insurance applies." The majority held that despite the expansive definition of "claim" under the policy, until such time that a third party sought damages against the insured, the insurer had no duty to defend.
McCarthy Tétrault Notes:
As the above cases illustrate, before any events that could result in liability occur, an insured should carefully examine his or her policies to determine gaps in coverage. For example, if an insured is obligated to report circumstances that could result in a claim, but the policy only covers claims, the reporting of such circumstances could result in a refusal to renew the policy where claims have not yet been made. As many claims-made policies exclude from coverage claims arising from circumstances known prior to the coverage period, no coverage for such claims arising out of the reported circumstances would be available under subsequent policies.
When an event that could result in liability does occur, the insured should carefully review the policy and its definitions to determine whether he or she is obligated to report the event as either a "claim" or as a "circumstance" that could give rise to a claim. If so, it is important for an insured to strictly comply with the policy’s reporting provisions. If not, the insured should consider the possible consequences of reporting, which could include the possibility that an insurer will refuse to renew the policy. If the event is not covered by the policy, the insured should be aware that legal fees expended prior to an actual claim being made will not be recoverable.
A number of claims-made policies both allow the insured to report events that may subsequently give rise to a claim and provide coverage for claims that may arise out of such events (if the events are properly reported during the policy period) after the policy period expires. Where this coverage is provided, careful consideration should be given to triggering such coverage to avoid any potential gaps.
In each case an insured needs to make an informed and strategic decision in terms of reporting when faced with either a claim or circumstances that may give rise to a claim.
This article originally appeared in the January 11, 2008 issue of The Lawyers Weekly published by LexisNexis Canada Inc.