Strict Notice Rule Prevails: First Circuit’s Message to Massachusetts Insureds

Ruling Underscores Importance of Timely Reporting Claims-Made Policies

In a ruling for the insurance industry, the First Circuit Court of Appeals has upheld strict notice requirements in claims-made policies. The case Stormo v. State National Insurance Company reinforced the no-prejudice-and-prejudice late notice distinction between claims-made and occurrence policies under Massachusetts law..

In this case, the issue was whether an insurer must demonstrate prejudice before denying coverage based on late notice in a claims-made policy. The court’s decision, affirming the district court’s judgment, emphasized that such policies fundamentally differ from occurrence policies in their treatment of notice provisions.

This ruling underscored once again the importance of timely reporting for claims-made policies. This decision is just the latest of several recent Massachusetts court decisions Agency Checklists has reported on denying coverage to late-reporting claimants with claims-made policies.

These include the February 1, 2022, article “Mass. Appeals Court Reaffirms Rigid No-Prejudice Notice Rule for Claims-Made Policies”; the August 15, 2023 article, “The Pitfall of Late Notice: Harvard’s $15 Million Coverage Loss,” and the September 11, 2023, article, “Claims-Made Policy Snares Another: Preservation Trust Loses Coverage For Late Notice.”

Background of the lawsuit

The Stormo v. State National Insurance Company case originated from a 2004 real estate transaction.

Joan Stormo and her siblings (“Stormo”) hired attorney Peter Clark (“Clark”) to handle a real estate sale to KGM Custom Homes. What should have been a straightforward transaction spiraled into a legal nightmare due to Clark’s astonishing missteps.

Clark derailed the real estate deal at the closing after falsely claiming Stormo had a higher offer and mistakenly trying to leverage a liquidated damage clause in the purchase documents as Stormo having a “right to rescind.” His actions supposedly left Stormo stunned and KGM furious, igniting successive lawsuits spanning twenty years.

After the abortive closing, KGM sued Stormo, defended by Clark, and recovered a substantial judgment, ultimately causing Stormo to pay over $1 million in damages. The court’s opinion highlighted Clark’s breach of both express and implied good faith and fair dealing covenants. Based on the court’s rulings, KGM pursued independent legal action against Clark. Clark reported the KGM action to State National, which settled the lawsuit for $694,801.40, substantially depleting Clark’s $1 million professional liability policy.

On October 6, 2014, Stormo, after having finally learned the full scope of Clark’s missteps, filed a malpractice suit against Clark in the Massachusetts Superior Court.

Clark held a claims-made policy with State National, effective from March 16, 2010, to March 16, 2011, covering misconduct since March 1, 2002. This policy contained an interrelation provision for multiple claims arising from the same wrongful act.

This provision stipulated that related claims would be treated as a single claim, deemed first made on the date of the earliest claim. Consequently, Stormo’s 2014 claim was treated as if it were made in 2010 when KGM filed its suit, falling within the policy period.

Clark misinterpreted the policy and failed to notify State National of Stormo’s lawsuit until December 2015, approximately 14 months after its filing. State National disclaimed liability for late notice and refused to defend Clark.

A jury awarded Stormo $1,243,416.62 for Clark’s malpractice, and the judge sitting without a jury trebled the damages to $3,769,627.53 under G.L. c. 93A for Clark’s unfair and deceptive acts or practices in commerce or trade. The court also assigned Clark’s professional liability policy and his rights against State National to Stormo.

Clark’s delay in reporting the Stormo suit to State National and the policy’s interrelation provision set the stage for a legal battle over the notice requirements in claims-made policies, leading to the First Circuit’s ruling.

The State National Policy

The liability policy assigned to Stormo by the Superior Court was a claims-made attorney malpractice policy issued by State National to Peter Clark. This type of policy, common in professional liability insurance, usually covers claims made against the insured during the policy period, regardless of when the alleged wrongful act occurred.

Clark’s policy contained two key notice provisions that became the basis for Stormo’s coverage claim. The first clause, a “within-policy-period” requirement, mandated that claims be reported during the policy period or within 60 days thereafter. The second clause was a “prompt written notice” clause requiring the insured to promptly notify the insurer of any claim without specifying a timeframe.

The policy also included an interrelation provision that treated multiple claims arising from the same wrongful act as a single claim. This provision deemed such claims to be first made on the date of the earliest related claim. In this case, Stormo’s 2014 claim was treated as if it were made in 2010 because of Clark’s wrongful act alleged in KGM’s earlier 2010 claim against Clark.

The policy’s total liability limit was $1 million. However, the previous settlement of KGM’s claim against Clark had reduced the available coverage to $305,198.60.

The policy’s interrelation provision extended potential coverage to Stormo’s claim despite it being filed after the policy period. However, Clark’s 14-month delay in reporting the claim raised questions about compliance with the notice requirements and whether the insurer could deny late notice regardless of any demonstrated prejudice.

A million-dollar jury verdict nullified

After State National refused to indemnify Stormo as Clark’s court-ordered assignee, Stormo filed suit in the United States District Court for the District of Massachusetts. The case proceeded to trial, where a jury found in favor of Stormo, awarding $1,106,138.10 for State National’s breach of the insurance contract.

However, State National moved for judgment notwithstanding the verdict (JNOV). This legal maneuver allows a judge to overturn a jury’s verdict if the judge determines that a reasonable jury could not have reached that decision based on the evidence presented.

Judge F. Dennis Saylor IV granted State National’s JNOV motion, nullifying the jury’s decision. His ruling centered on Clark’s failure to provide timely notice of the claim. Judge Saylor ruled that Massachusetts law strictly enforces notice requirements in claims-made policies, even without a showing of prejudice to the insurer.

This decision set the stage for Stormo’s appeal to the First Circuit. If Stormo prevailed on appeal, the jury’s verdict would be reinstated with interest. If not, Judge Saylor’s order would stand, leaving Stormo without recourse against State National.

A split decision goes against the Plaintiff

Sitting as a three-judge panel, the First Circuit Court of Appeals reviewed the district court’s decision to take away Stormo’s jury verdict. Two justices affirmed the judgment in favor of State National, while the third filed a dissenting opinion.

The majority opinion upheld the district court’s judgment notwithstanding the verdict. The court’s analysis focused on interpreting Massachusetts law regarding claims-made policies and notice requirements.

The majority distinguished between occurrence-based and claims-made policies, emphasizing their fundamental differences in purpose and structure. They noted that while occurrence policies typically require insurers to demonstrate prejudice before denying coverage for late notice, claims-made policies operate under different principles.

Relying on Massachusetts precedents, particularly Chas. T. Main, Inc. v. Fireman’s Fund Ins. Co. and Tenovsky v. Alliance Syndicate, Inc., the majority concluded that strict enforcement of notice requirements in claims-made policies aligns with their essential purpose of minimizing the time between insured events and payments.

The court rejected Stormo’s argument that the “prompt written notice” provision should be treated differently from a “within-policy-period” notice requirement. It held that both types of provisions in claims-made policies serve the same function of ensuring timely reporting.

This ruling reinforces the strict interpretation of notice requirements in claims-made policies under Massachusetts law, regardless of whether the insurer suffered actual prejudice from the late notice.

The Chief Judge dissents but to no avail, as the majority prevails

Chief Judge Barron penned a lengthy and detailed dissent to the majority opinion, advocating for a more nuanced approach to the notice requirements in claims-made policies. He argued that the case presented a novel question of Massachusetts law that warranted certification to the Supreme Judicial Court (SJC) for clarification.

The Chief Judge’s dissent highlighted the distinction between “within-policy-period” notice provisions and “prompt written notice” provisions. Judge Barron opined that when a claims-made policy contains both types of provisions, as in this case, the “prompt written notice” requirement might serve a different function than ensuring fairness in rate-setting—the supposed primary purpose of “within-policy-period” provisions.

Judge Barron suggested that the “prompt written notice” provision, when paired with a “within-policy-period” provision, might be more akin to an “as soon as practicable” notice requirement found in occurrence policies. If so, it could potentially be subject to the notice-prejudice rule under Massachusetts law.

The Chief Judge’s dissent also noted the unique circumstances of this case, where the claim at issue was deemed “related” to an earlier claim and thus treated as if made within the policy period. This feature, Judge Barron argued, further complicated the application of existing precedents.

By advocating for SJC certification, Judge Barron’s dissent underscored the complexity of the legal issues and the potential for a future claimant to raise this issue. The majority’s straightforward application of the policy’s notice provisions deferred to existing case law. Judge Barron’s more nuanced approach recognizing the interplay between different notice provisions in this form of a claims-made policy may prevail if the right case reaches the SJC.

Afterthought

Insurance professionals who have read this article and want some claims-made takeaways to avoid traps for the unwary may find my September 18, 2023 article, “Do You Know These 10 Key Things About Claims-Made Policies?” helpful. Thank you for your attention.

Owen Gallagher

Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists

Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.

Connect with me directly, by calling me at 617-598-3801.