Matkin-Hoover Engineering, Inc. v. Everest Nat'l Ins. Co., No. 08-cv-0451 (W.D. Tex. May 23, 2009)
This case illustrates one of the deadliest coverage traps for policyholders in the coverage world: late notice under a claims-made liability policy. Matkin-Hoover (MH) designed a shopping center and parking lot. Drainage problems appeared soon after construction, and the owner sent a series of e-mails and letters to MH, the general contractor, and the paving subcontractor raising the problem and seeking a solution. Eventually, litigation ensued. MH promptly submitted the suit papers to Everest, MH's professional services liability insurer, but Everest refused to defend the suit, alleging untimely notice of the claim.
Like many errors & omissions type policies, MH purchased a "claims-made" (as opposed to "occurrence") policy. The distinction between an "occurrence" and a "claims-made" type policy is crucial. "Occurrence" policies cover the insured's liability for claims asserting that the covered event or conduct (the "occurrence") occurred within the policy period, without regard to when the claim was actually asserted or the lawsuit filed. By contrast, "claims-made" policies respond to claims asserted against the insured within the policy period, without regard to when the event or conduct occurred giving rise to the claim (although most claims-made policies impose a retroactive date limiting how far into the past the coverage will extend).
Last year, the Texas Supreme Court simplified late-notice disputes under occurrence policies by requiring the insurer to defend despite late notice of the claim unless the insurer can prove prejudice, which is almost impossible as long as notice was sent before trial. See my discussion at PAJ Decision. By contrast, failure to submit timely notice of a claim under a claims-made policy is usually fatal. The insurer may avoid coverage simply by proving late notice.
Here, MH sent notice in May 2006, as soon as the lawsuit was filed. The annual policy period began April 15, 2006. Notice in May would be timely unless the owner first made a claim before April 15, which is the crux of the dispute in this case. What constitutes a "claim"? As defined in the policy:
"Claim" means a demand for money or professional services received by the insured for damages, including but not limited to, the service of a lawsuit or the institution of arbitration proceedings or other alternative dispute resolution proceedings, . . .
Everest argued that MH received a "claim" at least as early as January 29, 2006, when the owner sent an email to MH and the contractors stating that the parking lot, "does not drain properly and has gotten worse since the last repairs . . . I regret that I have to keep inviting you back to deal with the problem. . . Please get [MH] to evaluate the situation to determine what really is the problem and how best to solve it."
MH responded by blaming the paving contractor for failing to follow the engineering plans. The owner sent MH a letter in March 2006 asserting that the design slope was too flat and concluding:
You need to to develop a plan to correct the drainage problem. Your plan has to include an engineering design and a provision for adequate funds to finance the construction. Please provide such a plan to us by close of business on April 10, 2006.
The court rejected Everest's assertion that this constituted a sufficiently clear demand for money or professional services as damages. The court was influenced by the fact that the owner sued the contractors as well as MH. However, the primary basis for the decision was the court's determination that asking for a plan fell short actually demanding relief.
Nevertheless, I can tell you that other judges could come down on the insurer's side. This is a very close call. The court rightly gave the insured the benefit of any doubts, but this decision could be appealed, and the appellate court court reverse (the appellate court owes no deference to the lower court's interpretation of the language; it would make its own judgment). However weak the "demand" might seem, a reasonable person arguably could interpret the letter as a demand.
The practical problem with this scenario is that most risk managers are reluctant to submit correspondence about a problem early in process, perhaps because most disputes get worked out short of litigation. Also, insureds may fear that premature submission of "noise" letters might result in higher premiums or even non-renewal of coverage. However, in my experience, that doesn't happen.
I advise clients to err on the side of submitting this kind of correspondence early. Most claims-made policies allow the insured to send notice of circumstances that might result in a "claim" (even before receiving any communication that might be a "claim"), any any later claim, even if made after the policy has expired, will be deemed to have been made (and notice given) at the time of the notice of circumstances.
Early notice has little or no downside for the insured and avoids the risk of denial for untimely notice. If anyone has experienced a punitive bump in premium or cancellation because of early notice of a possible claim, please let me know.
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