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FAQ: What Is A Claims Made Policy?

Posted by Jeffrey Forbes on Feb 13, 2020 9:00:00 AM

faq what is a claims made policy

Claims made insurance coverage can create some confusing issues.  A claims made policy covers claims that are made against the policy during the period of the policy’s effective dates.  This is in distinction to an occurrence policy, which covers claims based on the policy in effect when the incident giving rise to the claim occurred. 

Gathering The Details To Determine Coverage

On its face, this may seem like it should be straight forward to determine which policy will cover a claim.  In a normal scenario, the insured would be served with a lawsuit or a demand letter, notify his insurance company immediately, and the policy would defend him.  However, litigation is rarely so straight forward.  Multiple cases may arise out of similar circumstances, or a related case may be filed a year later alleging similar facts.  Correctly determining which policy applies might affect the nature of the defense to be offered or the limits applicable to the case, so determining the correct point at which is the claim is “made” is vitally important.

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Emmis Communications v Illinois National Insurance

This issue arose in a recent case before the Seventh Circuit Court of Appeals.  The case, Emmis Communications Corp. v. Illinois National Insurance Co., involved litigation stemming from a failed attempt to take a public company private.  Shareholders sued the officers and directors of the company for a breach of fiduciary duty for approving the go private deal, but the lawsuits were dismissed when the deal fell through.  Litigation also arose from the withdrawal of financing meant to be used to complete the go private transaction, but that case was settled.  A year later, the company embarked on stock repurchase plan that allowed it to re-write the rules of its preferred stock.  This re-writing of the rules led to a second wave of lawsuits against the company and its directors and officers. 

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Suing For Reimbursement

The company at issue had purchased Directors and Officers Liability insurance, including entity coverage.  The policies covered 2009 and 2010 with one carrier and 2011 and 2012 with a separate carrier.  When the company was served with the paperwork for the second set of lawsuits, it notified its broker.  The broker in turn notified both carriers for all four policy periods.  Both carriers denied coverage for different reasons.  The company incurred four million dollars in legal fees successfully defending itself and then sued Illinois National Insurance Co., the carrier for the 2011 and 2012 policies for reimbursement.

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Language Limiting Coverage Included In The Terms

Illinois National rested its refusal to defend the company on a Specific Event exclusion.  One part of that exclusion stated that the policy would not cover or make payment for any loss that had been reported to the carrier for the 2009 and 2010 policies.     The carrier argued that this meant any notice to that carrier at any time, and therefore the decision of the broker to notify both insurance carriers as a precautionary measure meant Illinois National had no obligation to pay under the policy.  The carrier also alleged that the factual circumstance of the original lawsuits in 2010 were sufficiently related to the stock repurchase litigation as to relieve Illinois National of its obligation to cover the lawsuits. 

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The Court Finds In Favor Of Emmis

The Court ultimately rejected both arguments.  The Court considered the operative facts of the two lawsuits significantly different – with one relating to the go private attempt and the other relating to the stock repurchase plan.  To that end, the claim against the Directors and Officers policy was made in 2012, not 2010, meaning the 2012 policy should cover the lawsuit.  In reference to the notice to the prior carrier, the Court held that the Specific Event exclusion referred only to those claims that had been reported to the prior carrier before the effective date of the first Illinois National policy. 

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Coverage For Claims

Still, the case helps demonstrate how determining which policy should cover a claim in a claims made situation can become exceedingly difficult.  An exercise in caution – notifying both carriers due to the confusion over which policy should apply – almost led to a lapse in insurance coverage.  Attention to these details is vital.  It might save you a few million dollars in legal fees down the road.

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Topics: Claims, For Your Business, Insurance Coverage, Risks For Businesses, ECBM Experts