NH Federal Court Issues Decision on “Claims-Made-and- Reported” Provisions of E&O Policy

In a decision issued last month,  Clauson & Atwood v. Professionals Direct Insurance Co.,12-cv-00199-JL (May 13, 2013), the New Hampshire Federal District Court resolved an insurance coverage dispute over the meaning of a “claims-made-and-reported” provision in an errors and omissions (“E&O”) insurance policy.

Clauson & Atwood (“Clauson”), a New Hampshire law firm, had been hired to pursue a timber-trespass lawsuit in New Hampshire state court for its client, James Yager (“Yager”).  Clauson, however, failed to file suit within the 3-year statute of limitations, which eventually resulted in the case being dismissed on summary judgment.  Clauson appealed the trial court’s dismissal order to the New Hampshire Supreme Court.  Yager, however, sought advice from another law firm which, in January of 2011, provided Clauson with written notice of Yager’s “potential” malpractice claim against Clauson and of Yager’s intent to pursue the legal malpractice claim if the appeal proved unsuccessful.  The notice also encouraged Clauson to immediately notify its E&O carrier, Professionals Direct Insurance (“Professionals”), of Yager’s potential claim.  Yager offered to enter into a “tolling” agreement, agreeing not to file the malpractice suit immediately, so long as Clauson agreed that any statute of limitations period applicable to the malpractice claim would be extended by agreement for an additional 12 months following resolution of the appeal.   Clauson signed the tolling agreement in February of 2011.  

Clauson’s E&O policy with Professionals was a “claims-made-and-reported” policy that provided coverage only for claims “first made against [Clauson] and reported [to the E&O carrier] during the policy period.”  The reporting period for the policy ended on September 29, 2011. Clauson, however, did not notify Professionals of the potential claim before the September 29, 2011 deadline, apparently believing that the Supreme Court would overturn the dismissal and because the parties had agreed, by virtue of the “tolling” agreement, to “postpone” any malpractice claim until the appeal was finally resolved.  Clauson submitted a renewal application to Professionals, seeking to renew the E&O policy for another 1-year period, from September 29, 2011 to September 29, 2012.  Clauson’s application, however, failed to inform the carrier of Yager’s potential claim. 

In early October of 2011, the New Hampshire Supreme Court affirmed the trial court’s dismissal ruling, finding that Clauson had indeed waited too long to file the timber trespass suit.  A month later, Yager’s new counsel provided Clauson with a copy of a draft malpractice complaint and again directed Clauson to notify Professionals of the impending malpractice suit.  Clauson promptly forwarded the draft malpractice complaint to Professionals.   Yager formally filed suit against Clauson in February of 2012, and Clauson immediately demanded confirmation that Professionals intended to defend the claim and indemnify Clauson against any loss.  Professionals, however, refused to defend or indemnify, asserting that Yager’s claim had not been both “made” and “reported” in the current policy period and that there was no coverage.  Clauson’s declaratory judgment action soon followed.

In the Declaratory Judgment action, Professionals conceded that the malpractice claim had been “reported” within the policy period, but it asserted that the claim was not also “made” within the applicable reporting period, as required by the policy.  The Federal Court agreed and held that, under Clauson’s “claims-made-and-reported” policy,  a claim is “made” as soon as “the insured learns of specific circumstances involving a particular person or entity which could reasonably be expected to result in a demand or suit for money or services.”  The Court held that Clauson had such knowledge in February of 2011, when it first received written notice of the potential malpractice claim.  Clauson’s belief that it would prevail in the appeal did not alter the result.  Moreover, Clauson’s agreement to enter into the tolling agreement was irrelevant, because Clauson had never provided a copy of that agreement to its carrier within the pertinent coverage period (September 29, 2010 – September 29, 2012).  Finally, the Court rejected Clauson’s argument that Professionals had not been prejudiced by the delayed reporting.  That argument was unavailing, because “there is no requirement that an insurance company prove that it was prejudiced due to lack of notice under a claims made policy.”  Finally, the Court said the prejudice question was irrelevant because the issue was not one of “late notice” within the policy period; rather, Clauson was attempting to obtain coverage for a claim that was “made” before its current policy had taken effect.   Because Yager’s claim was “made” prior to the inception of the current policy period, and because the policy only covered claims “made” within the policy period, the Professionals had no duty to defend or indemnify Clauson.

For more information on Professional Liability Issues, contact Attorney Greg Moffett at 603-410-1500 or visit Preti Flaherty's Professional Liability Practice Group's page.