Second Circuit Court clarifies when policyholders must report misconduct allegations to insurers
Policyholders must grasp claims-made insurance policy nuances and the risks of failing to notify insurers about potential claims.
The U.S. Court of Appeals for the 2nd Circuit’s recent decision in Pine Management v. Colony Insurance Company underscores the critical importance of providing notice to insurance carriers of possible claims, even when a specific demand is absent.
The case involved Pine Management, a company that acquires, manages and develops rental apartment buildings. Pine purchased a professional liability insurance policy from Colony Insurance Company, which was effective from Aug. 1, 2018-Dec. 1, 2019. Plaintiff Jerome Schneider, who represented 10 New York limited liability companies (collectively, the Schneider Group), sued Pine in July 2019 for mismanagement.
The Schneider Group’s complaint included a letter dated July 17, 2018, from their counsel, Holland & Knight, to Pine that detailed allegations of wrongdoing and theories of liability against Pine. The letter did not make a specific monetary demand but suggested a meeting to discuss resolving the dispute.
Pine’s held a “claims-made-and-reported” policy with Colony. This meant the policy insured any “[l]oss result[ing] from a claim first made and reported in writing during the policy period.” In turn, Colony defined a “claim” to be a “written demand received by [Pine] for monetary, nonmonetary or injunctive relief.”
When Pine sought coverage for the Schneider Group litigation, Colony denied it, alleging that Holland & Knight’s letter constituted a claim preceding the policy period. Pine challenged this, countering the letter did not demand relief and was not a “claim” as the policy defined it.
The U.S. District Court for the Southern District of New York sided with Colony, and the Second Circuit affirmed. The circuit panel held plaintiff’s counsel’s letter to be a “claim” under the policy’s terms since it detailed misconduct and referenced future litigation. As a result, Pine could not obtain coverage from Colony for fees related to the Schneider Group litigation.
Key takeaways for policyholders
The outcome of this case demonstrates that policyholders must understand the nuances of claims-made insurance policies and the possible pitfalls of not notifying insurers about potential claims before their policy periods expire. But there are some other takeaways insureds should note as well, including:
• Understanding claims-made policies: Unlike occurrence-based policies, which cover incidents occurring during the policy period regardless of when the claim is made, claims-made policies provide coverage only if the claim is made and reported within the policy period. Coverage eligibility turns on when the claim was made and reported, not when the misconduct occurred or when associated costs arose. However, a policy may exclude claims arising from before a certain date.
• Defining a claim: The Pine court’s finding that Holland & Knight’s letter qualified as a claim, despite lacking a direct demand for relief, clarifies what policyholders should look for if they receive similar correspondence. Under Pine’s policy, a claim included any written demand for monetary or non-monetary relief arising from wrongful acts. However, the court focused primarily on the allegations of misconduct, finding that the “suggestion” of a scheduled meeting coupled with threats of future litigation amounted to a “demand for relief.” Therefore, Pine suggests insureds should focus on whether the notice they receive includes misconduct allegations when assessing whether to report it. The court implied that no one sends such letters for any purpose other than to make demands.
• Policy renewal periods: The period before policy renewals is critical. Pine, for example, received Holland & Knight’s letter less than two weeks before its new Colony policy started. The decision signals that insureds with prior policies should notify their previous carriers during their reporting periods and account for potential claims even after obtaining new insurance.
• Individual policy periods: Policyholders should report known potential claims or circumstances that could give rise to claims to their prior carriers before their policy reporting periods end. Even when renewing with the same insurer, each policy period typically stands alone, requiring insureds to make and report claims within that period. One of the common mistakes insureds make is not focusing on the importance of the individual policy periods and treating insurance reporting nebulously.
• Proactive risk management: Policyholders often worry that reporting potential claims will increase their insurance rates. While it is possible that there could be associated rate increases, most carriers seek long-term relationships and do not want to penalize policyholders for reporting potential claims. Instead, they focus more on resulting losses.
Practical steps for policyholders
Given Pine’s outcome, policyholders should not sit idle whenever they receive notices that could constitute claims. Fortunately, there are steps they can execute immediately to mitigate similar outcomes, including:
• Regular policy review: Teams should regularly review insurance policies to understand how insurers define key terms such as “claim,” “notice” and “reporting requirements.”
• Internal reporting mechanisms: Stakeholders must establish clear internal reporting mechanisms to ensure potential claims are promptly brought to personnel managing the company’s insurance policies.
• Documentation and communication: Insureds should maintain thorough documentation of communications and incidents that could evolve into claims. Leaders should ensure they promptly communicate these incidents to relevant contacts. Furthermore, they should identify and timely report any potential liabilities or incidents that could lead to claims.
• Legal and risk management consultation: Policyholders should consult with legal and risk management professionals to understand their relevant obligations and risks. Insurance brokers can provide valuable insights into market and underwriting trends and explain how different carriers may approach certain reported claims. While these individuals are valuable resources, it is still the insured’s duty to report any claim.
• Policy renewal strategy: During policy renewals, teams should thoroughly review incidents or communications that could be labeled potential claims. Afterward, they should communicate with relevant contacts to identify potential claims and report them under the soon-to-be-ending policy.
• Review the expiring policy: Insureds should determine the last date the organization can report claims under its expiring policy. Personnel should then review the policy language to ensure all reporting requirements are met, and that the policy sufficiently preserves coverage for noticed matters. Most policies extend the reporting period beyond the final day of the policy or allow the insured to purchase a “tail” or extend the reporting period.
Other implications and concerns
Pine is just as instructive to insurers as it is to policyholders. Insurers may not be required to provide coverage or reimburse expenses until after a claim is made. Therefore, insurers may be incentivized to parrot Pine’s arguments that particular communications did not demand relief and, in turn, did not trigger claims.
This strategy can create tension between a policyholder’s prior and current insurers. For example, the previous insurer may argue a communication does not necessitate coverage, while the current one could allege it’s a pre-policy claim. Again, the Second Circuit’s emphasis on the presence of misconduct allegations over concrete demands for relief should guide insurers on whether they’re dealing with a claim.
To avoid this issue, policyholders could ensure their policies allow for “notice of circumstances” reporting. This allows policyholders to report circumstances that may give rise to claims so that the policy would cover any related, subsequent actions. These terms allow policyholders to preserve coverage eligibility without having to worry about how their carriers would interpret a third party’s correspondence.
Evan W. Bolla is a partner, general counsel and the chair of the insurance recovery practice group at Harris St. Laurent & Wechsler.
Opinions expressed here are the author’s own.
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