Claims-Made-And-Reported Policy Limitation

Shannon Howard-EldridgeClaims-Made-And-Reported Policy Limitation is Enforceable Against Third Parties:
Joyce Gorman v. City of Opelousas, Et. Al., No. 2013-C-1734, Louisiana Supreme Court, 07/01/14

 The Louisiana Supreme Court recently reversed a ruling of the Third Circuit Court of Appeal, reinstating the ruling of the trial court in St. Landry Parish and finding no coverage for a third party claimant under a “claims-made-and-reported policy” issued by Lexington Insurance Company (“Lexington”), thus resolving a split in the state Circuit Courts of Appeal.  Some Courts of Appeal had held that enforcement of the limitation deprived third parties of their rights under the Direct Action Statute, but several others held that the claims-made policy limitation was not per se invalid as against public policy. The Supreme Court found that the reporting provision in Lexington’s claims-made-and-reported policy is a permissible limitation on the insurer’s liability as to third parties and that such a limitation did not violate the Louisiana Direct Action Statute.

Lexington’s policy insured the City of Opelousas and its police department (“the City”) and extended coverage for claims against the City first made and reported in writing during the policy period.  Plaintiff’s claim against the City was not made within Lexington’s relevant policy period. The trial court originally granted summary judgment in Lexington’s favor on that basis. However, the Louisiana Third Circuit Court of Appeal reversed the trial court and, relying upon an earlier decision from that Circuit, held that the Louisiana Direct Action Statute gave Gorman a vested right at the time a tort was committed and that her right against Lexington could not be taken away because the insured failed to notify its own insurer – a condition over which the plaintiff had no control.

The Louisiana Supreme Court considered the facts and the clear conditions of Lexington’s policy issued to the City and determined that the risk of a claim incurred but not made, as well as a claim made but not reported, is shifted to the insured. The claims-made-and-reported policy is intended to provide a certain date after which the insurer has assurance that it can no longer be held liable and can close its books on that policy. A claims made policy differs from an occurrence policy in that respect. Because the claim was not reported to Lexington until after the policy period of the relevant policy had elapsed, Lexington’s policy extended no coverage to Gorman for any liability of the City.  Although the Direct Action Statute gives an injured third party the right to file suit against an insurer, it does not extend the protection of liability coverage to a risk that is not otherwise covered or that is excluded by the policy (at least in the absence of statutory mandatory coverage provisions). Three Justices of the Court dissented in favor of coverage for the third party claimant on the basis that the notice requirement would destroy the claimant’s rights against an insurer in an otherwise timely filed suit which the dissenting Justices determined to be against the law and policy behind the Direct Action Statute.

Given the majority ruling, it will be interesting to see whether claimants and their attorneys issue written demands and request proof that the insurer of a defendant has been put on notice of a claim even before suit is filed.  Given the Court’s ruling, such a demand for reporting and written proof of the reporting of the claim seems prudent.

Shannon Howard-Eldridge
July 8, 2014