Why insurers won their dispute over a $50-million excess policy

An insured is not entitled to coverage on a “claims made and reported” excess liability policy when it failed to report the claim to the excess insurer within the policy period, Ontario’s Appeal Court has confirmed.

The insured, a law firm, argued it was entitled to professional liability coverage despite “imperfect compliance” with the claim reporting conditions — an example of what the court calls “relief from forfeiture.” Essentially, the law firm contended, because its underlying professional liability policy was simply a “claims made” policy, that does not require reporting within a certain time period to trigger coverage under the excess policy.

The appellate court disagreed, noting the excess policy very clearly stated in its terms and conditions that it was a “claims made and reported” policy, meaning the insured had to report the claim to the excess insurers within the timeframe specified in the secondary excess policy.

Since the claimant did not report the claim within the secondary excess policy period, the conditions for coverage were not met, and so the law firm could not rely on “imperfect compliance” with policy terms by reporting the claim after the policy period.

In fact, the firm did report the claim to its brokerage on time. The brokerage, Hub International, reported the claim to the primary insurer and the first excess insurer on time, but it did not notify the secondary excess insurers until three years later. Hub took responsibility for the miscue, in part by funding the law firm’s lawsuit against the secondary excess insurers, as noted in the Court of Appeal decision.

However, whereas the underlying policy is a claim made policy — and so policy coverage may still be available if there is “imperfect compliance” with reporting claims within certain time periods — the secondary excess policy was a claims made and reported policy, and so the lack of notice within the policy period was fatal, the Appeal Court ruled.

“In light of my conclusion that reporting the claim to the insurer during the policy period is a condition precedent to coverage under the Second Excess Policy, the application judge was correct in concluding that relief from forfeiture was not available,” the Court of Appeal ruled.

The background

In Kestenberg Siegal Lipkus LLP v. Royal & Sun Alliance Insurance Company of Canada, Kestenberg Siegal Lipkus LLP and its individual lawyer, Marc Kestenberg, were insured under three professional liability policies.

The primary policy is underwritten by the Lawyers’ Professional Indemnity Company, and the liability limit is $1 million per claim.

The first excess policy is issued by Certain Underwriters at Lloyd’s, and the liability limit under this first excess policy is $9 million per claim.

The second excess policy, the subject of the legal dispute, is issued by Royal & Sun Alliance Insurance Company of Canada, Travelers Insurance Company of Canada, Axis Reinsurance Company (Canadian Branch), XL Specialty Insurance Company, operating as AXA XL, and Trisura Guarantee Insurance Company.

The second excess policy provides $50 million and covers the period Jan. 1, 2018, to Jan. 1, 2019. It does not respond until the limits of the LawPro and first excess policies have been exhausted (i.e., beyond $10 million per claim).

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In the events leading up to the claim, the law firm represented a client in an action in which the client sought to enforce a right of first refusal over a particular property.

On June 29, 2018, one of the defendants in the property action advised the law firm it intended to stay the action because a settlement entered into by the law firm’s client and another defendant had not been immediately disclosed to the defendant.

The law firm understood that if the defendant was successful, a professional liability claim may be made against them. On July 3, 2018, the law firm gave notice of a claim to LawPro. And on July 4, 2018, by email, the law firm asked their broker, HUB International HKMB Limited, to report the claim to their excess insurers.

“On July 5, 2018, the broker responded confirming that it would provide the notice,” the Appeal Court’s decision reads. “The broker promptly reported the claim to Lloyd’s under the first excess policy.

“However, the broker failed to report the claim to the [excess insurers] under the second excess policy until March 22, 2021 – almost three years after the [law firm] became aware of the claim and more than two years after the second excess policy had expired.”

The motion to stay succeeded, and the law firm was sued for damages of $125 million.

In a nutshell

The excess insurers denied the claim against the secondary excess policy, saying its notice of claim was too late. A lower court agreed, a decision the law firm appealed.

Among its several arguments before the appeal court, the law firm noted the secondary excess policy was a “follow form” policy. “Consistent with its follow form structure, the insuring agreement clause in the second excess policy refers back to the coverage clause in the first excess policy,” the Court of Appeal states.

The first excess policy is a claims made policy, the law firm argued, and so “imperfect compliance” with the claims reporting is not a reason to deny coverage.

But the Appeal Court noted the language in the second excess policy clearly stated it was a claims made and reporting policy. Since the reporting was not done in time, rather than “imperfect compliance,” the late notice in fact did not trigger coverage.

Feature photo courtesy of iStock.com/designer491