Typical claims-made insurance policies require claims to be both made and reported within the applicable policy period. Under this type of policy, the risk of a claim incurred but not made, as well as a claim made but not reported, is shifted to the insured. See, generally, Bob Works Excusing Non-Occurrence of Insurance Policy Conditions in Order to Avoid Disproportionate Forfeiture: Claims-Made Formats as a Test Case, 5 CONN. INS. L.J. 505, 546 (1999). “The purpose of the reporting requirement [in a claims-made policy] is to define the scope of coverage [purchased by the insured] by providing a certain date after which an insurer knows it is no longer liable under the policy.” Resolution Trust Corp. v. Ayo, 31 F.3d 285, 289 (5th Cir. 1994). Thus, once the policy period and reporting period expire, the insurer closes its books on that policy.
The Louisiana Supreme Court in Gorman v. City of Opelousas, 2014 WL 2937129 (La. Aug. 25, 2014) held that a claims-made policy provision requiring a claim to be made and reported within the period specified by the policy was not violative of public policy because of Louisiana’s direct action statute. The claimant in Gorman argued that Louisiana’s direct action statute created a vested right at the time the tort was committed that could not be taken away because of an insured’s failure to notify the insurer of the claim—a condition over which the plaintiff had no control. The claimant argued that the statutory protection afforded to the public under Louisiana’s direct action statute, LA. R.S. §§ 22:1269(B)(1) and 22:868(B) conferred substantive rights to injured third-parties which vested when an injury occurred. Previously, the Louisiana Supreme Court had recognized that the state’s direct action statute “expresse[d] the public policy of [Louisiana] that an insurance policy against liability is not primarily for the protection of the insured but for the protection of the public.” West v. Monroe Bakery, 217 La. 189, 46 So.3d 122, 129-30 (1950). Because of this public policy, the Court in West found that where a third-party was not at fault in causing the insurer’s failure to receive timely notice as required by an occurrence policy, the third-party could not be made liable for the insured’s breaching of an agreement with an insurer.
Since the West decision was decided, the Appellate Courts of Louisiana were divided on the issue of whether the principle announced by the Court in West applied in the context of claims-made and reported policies. Compare Williams v. Lemaire, 94-1465, p. 5, 655 So.2d 765, 768 (La. App. 4th Cir. 5/16/95) and Murray v. City of Bunkie, 96-297, p. 8, 686 So.2d 45, 50 (La. App. 3rd Cir. 11/6/96) (both Courts refusing to distinguish between claims-made policies and occurrence policies and that enforcement of claims-made reporting provisions deprived injured third-parties of their right of action under Louisiana’s direct action statute) with Reichert v. Bertucci, 94-1445, 650 So.2d 821, 823 (La. App. 4th Cir. 1/31/95), Case v. Louisiana Medical Mut. Ins. Co., 624 So.2d 1285, 1289 (La. App. 3rd Cir. 1993), and Bank of Louisiana v. Mmahat, 608 So.2d 218, 221 (La. App. 5th Cir. 1992) (these Courts declining to apply the principle of West in the context of claims-made policies finding the notice requirements not per se invalid as against public policy).
The Louisiana Supreme Court in Gorman focused its analysis on its prior decision in Hood v. Cotter, 08-0215, 08-0237, 5 So.3d 819 (La. 12/2/08). In Hood, the plaintiff patient’s claim for medical malpractice was neither first made against the doctor nor reported to the insurer during the policy period as required by the policy. The Court considered the public policy implications and concerns involved in the case because the claim had been both made and reported less than one year from the date of the acts giving rise to the patient’s medical negligence action. Louisiana’s direct action statute provides that an injured person, at his or her option, “shall have a right of direct action against the insurer within the terms and limits of the policy.” LA. R.S. § 22:1269(B)(1). It is further provided in LA. R.S. § 22:868(B) that no insurance contract delivered within the Louisiana “shall contain any condition, stipulation, or agreement limiting [the] right of action against the insurer … to a period of less than one year from the time when the cause of action accrues.…” In Hood, the Court considered whether Louisiana’s public policy as expressed in the direct action statute would permit insurer’s to deny coverage to the patient where the doctor had failed to properly report the claim to the insurer. In reversing the prior court decision in favor of the injury party in Hood, the Louisiana Supreme Court had recognized that the direct action statute “grants a procedural right of action against an insurer where the plaintiff has a substantive cause of action against the insured.” Hood, 08-1215, 08-0237 at 17-18, 5 So.3d at 829 (emphasis added).
Based on the Court’s prior holding in Hood, the Louisiana Supreme Court held in Gorman that in the absence of coverage to the insured, the third-party claimant was not deprived of her rights under Louisiana’s direct action statute because that statute did not extend any greater right to the injured third-party who was damaged by the insured. The Court stated:
Any right that [the third-party claimant] might have had under the [insurance] policy did not vest at the time of her son’s injury. To hold otherwise would effectively convert the [insured’s] claims-made-and-reported policy into an occurrence policy, resulting in the judicial modification of the bargained-for exchange between the insurer and insured. We recognize that an injured third party rarely has knowledge of the identity of the insurer of the party responsible for an injury, making it nearly impossible for an injured third party to give notice to the insurer. Rather, the injured third party generally has to rely on the insured, which has an interest in ensuring the availability of the coverage it purchased, to comply with the reporting provision in its policy. Although we can contemplate no logical reason why the [insured] would not report a claim for which it apparently purchased insurance coverage, we decline, under the facts of this case, to hold the insurer liable for the [insured’s] failure to report the claim as required by the [insurance] policy. A contrary finding would, where there is no evidence of fraud or collusion, punish the insurer for the inactions of its insured.
Thus, the Louisiana Supreme Court, as a follow up to the Hood decision has now recognized that in the claims-made insurance policy context the insured’s failure to report the claim as required by the policy will bar coverage irrespective of Louisiana’s direct action statute.
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