E&O - Employment Practices Liability (EPL) - When Is a Claim First Made - Late Notice - Notice-Prejudice Rule - Distinction Between "Claims Made" and "Claims Made and Reported" Policies
The United States District Court for the District of Maryland recently considered the issues of what constitutes an employment practices claim, late notice and a very cogent analysis of the distinction between pure “claims made” and “claims made and reported” policies and the ramifications of the distinction for purposes of applying a prejudice standard to a late notice defense. Financial Industry Regulatory Authority v. AXIS Ins. Co., No. 12–cv-1053, (D. Md., June 12, 2013). [See here for link to decision]
The issues as to when a claim is first made and when it must be first reported were fairly straight forward in this case. The insurer issued two consecutive claims made and reported EPL policies to the insured. Each required that the claim be first made against the insured during the policy period with a reporting requirement of “as soon as practicable,” but no later than 6o days after policy expiration.
There was a Charge of Discrimination filed with the EEOC in policy period No. 2, but the Court found that the claim was first made in policy period No. 1 when there was an e-mailed settlement demand referencing an earlier verbal communication. The insured argued that the claim was not made in writing as the policy required, but the Court held that the e-mail confirmation of the verbal demand clearly satisfied the policy requirement of a written demand. Thus, there was no coverage under policy period No. 2.
The insured argued, alternatively, that the claim was indeed made in policy period No. 1 and that (i) it was not reported materially late, and (ii) even if it were, the insurer must show that it was prejudiced by the late notice.
The Court considered § 19-110 of the Maryland Insurance Code, which provides in pertinent part as follows.
An insurer may disclaim coverage on a liability insurance policy on the ground that the insured . . . has breached the policy by failing to cooperate with the insurer or by not giving the insurer the required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer. (emphasis added by the Court)
So, when does an insured breach the policy by not timely reporting a claim?
According to the Court, the answer to this depends on whether the policy is simply claims made or claims made and reported. A claims made policy only requires reporting to be prompt or as soon as practicable, while a claims made and reported policy requires the reporting to be during the policy period or before some otherwise bright line cut-off date. In a pure claims-made policy, the condition precedent to coverage is that the claim be made against the insured during the policy period. If the insured fails to report that claim timely, it is a breach of the insurance policy such that § 19-110 of the Maryland Insurance Code would apply and the insurer would have to show it was prejudiced in order to disclaim based on the late notice.
No such prejudice requirement, however, exists in the case of a claims-made and reported policy. In essence, the triggering event or condition precedent, the reporting of the claim to the insurer within the prescribed time period, simply did not occur. Thus, there was no breach of any policy provision and no need for the court to undertake a prejudice analysis.
This is a very important decision because there has been some confusion in a few jurisdictions as to whether notice-prejudice requirements should apply to claims-made and reported policies. This decision sets forth a thorough analysis of how these policies differ from pure claims-made forms and why a prejudice requirement is not appropriate.
 I would like to clear the air on two common misconceptions in this area.
First, some commentators incorrectly note that a claims-made and reported policy requires claim reporting to the insurer to take place during the policy period. While this is one variant of a claims-made and reported form, the most common variant today allows for some “bright line” extension beyond the end of the policy period, most typically being 60 days, as in this case.
Second, some believe that a pure claims-made form has absolutely no reporting requirement. It is more correct, however, to say that the pure claims-made form has no “bright line” cutoff for reporting. Virtually all claims-made forms require reporting to be “as soon as practicable.” While, as discussed in this post, that may require the insurer to establish it was prejudiced by the late reporting, the as soon as practicable requirement may in many cases be construed as only allowing the insured a matter of a few days or weeks within which to report a claim to the insurer.
 Citing to 3 New Appleman on Insurance §20.01  [b], the Court noted that nationwide courts have uniformly held that there was no need to establish prejudice when the reporting requirement of a claims-made and reported policy was not satisfied.