Protecting yourself if you have a claims-based policy

In my last post I discussed the difference between claims-based and occurrence-based policies. I stated that if you have a claims based policy, your insurance provides coverage only if you receive and report to your insurer the claim during the policy period.


Claims can be brought years after you close out a project. The statute of limitations (the time period in which the law allows someone to bring a claim) for a negligence case in Massachusetts is three years. Other claims that might be covered by insurance have longer statutes of limitations. And there can be exceptions to statutes of limitations if, for example, the injured person was a minor or the injured person had no reason to learn of the injury at the time it occurred (for example, a misdiagnosis of an illness by a doctor).


Insurance companies deal with this by selling you "tail" insurance. Tail insurance covers claims that are brought against you in the future and is usually purchased by people who are closing down their businesses. You need to negotiate the terms of tail insurance, such as the period of time it will be in effect, based on your personal situation.

The difference between occurrence-based policies and claims-based policies

Liability insurance policies are either "occurrence-based" or "claims-based." An occurrence-based policy provides insurance coverage for a loss that "occurred" during the policy period, no matter when the claim is brought against the insured. A claims-based policy provides coverage for a claim that is brought within the policy period, no matter when the loss occurred.


Generally speaking, auto policies, homeowners policies, and commercial general liability policies are occurrence-based. Many professional liability policies are claims-based.


Let's say you had a policy that provides coverage for injury or damage caused by an apple tree you own. The policy was in effect from June 30, 2006 to June 30, 2007.


A plaintiff claims that as a result of your negligence, a branch of the apple tree broke and hit her on the head, injuring her.


If you had an occurrence-based policy, your insurance will cover you if the accident happened between June 30, 2006 and June 30, 2007. It doesn't matter if you were not notified of the accident until January, 2008; the insurance will still cover you.


If you had a claims-based policy, your insurance will cover you if you are notified, and notify your insurance company, of the accident between June 30, 2006 and June 30, 2007. If the accident happened between those dates but you don't receive notice of it until January, 2008, your policy will not cover you.


If future posts I will discuss the various issues that arise with respect to what "occurrence" means in an occurrence-policy, and the precautions you should take if you have a claims-based policy to make sure you do not have any gaps in coverage.

First steps for coverage attorneys

This is advice for attorneys working on their first insurance coverage cases.

If you represent the insurer, ask the insurer for a certified copy of the insurance policy or policies for every coverage year that may be triggered by the loss. Do this as soon as you receive the case. Certified copies are put together by the underwriting departments at the insurance companies, and it can take months for them to do it. I have had many experiences where the policy put together by the adjuster contains the wrong forms, is for the wrong policy years, or is just incomplete.

If you don't represent the insurer, or if other insurers are involved in your coverage dispute, immediately serve a request for production of documents requesting a certified copy of the policy or policies. You don't need to wait until you have an entire request for production of documents on all issues of the case; you can do your first request and then do a second, complete request when you are ready.

When you receive your certified copy, compare the forms listed on the schedule of forms and endorsements to the forms you have actually received. If there is a discrepancy, follow up immediately.

Make a copy of the policy you have received. Bates stamp your copy. When you refer to policy pages in motions (or memoranda to file), you can do it by Bates stamp numbers instead of making the judge flip through a dozen strangely-named forms trying to figure out which one you are referring to.

Drafting a demand letter to your insurer

In an earlier post I discussed how a 93A demand letter can help you if your insurer is acting in bad faith. This post discusses what you should say in a demand letter.

Your letter should be addressed to the adjuster you have been dealing with at the insurance company, and should be sent by first class mail and certified mail, return receipt requested. You should reference your claim number, which will be at the top of any correspondence sent to you by the insurer.

You should start the letter with, "This letter is a demand for settlement [or whatever you are asking for] of the above-referenced claim pursuant to Mass. Gen. Laws ch. 93A, the Massachusetts Consumer Protection Act, and Mass. Gen. Laws ch. 176D.

You should then state, "Pursuant to Mass. Gen. Laws ch. 93A, you are required to respond to this letter with a reasonable offer of settlement within 30 days. Failure to do so may result in your being liable for treble damages and my costs and attorney's fees."

You should then state what you are seeking insurance coverage for. Even if you have said this in previous correspondence, you should repeat it here. You should describe what happened; who is responsible (if applicable) and why; why the insurer has to pay the loss; and what your damages are. You should reference and include any supporting documentation.

You should discuss the history of correspondence or negotiations with the insurance company. This should include how and when you first notified the insurer of the claim, how the insurer responded, and all communications since then--at least to the extent that those communications support your claim that the insurer has not been properly responsive to your request for coverage.

You should state that the insurer's actions have violated Mass. Gen. Laws chs. 93A and 176D. You should specifically list any applicable subsections of Mass. Gen. Laws ch. 176D § 3(9). (If you click on the link, scroll down to (9).)

Finally, you should state the amount you are seeking in settlement (your "demand").

How to read an insurance policy: The insuring agreement

The "insuring agreement" is found on the first page of the "coverage form." (Note that this is generally not the first page of the insurance contract; that will be the declarations page. The other forms follow in more or less random order.)

The insuring agreement tells you in general terms what the insurance policy covers--but it doesn't actually provide much information. A typical first sentence of the insuring agreement of a commercial general liability policy is: "We will pay those sums the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." You still have to look elsewhere to figure out what "bodily injury" and "property damage" mean; I have been involved in cases where the meaning of "legally obligated to pay" has been an issue; "damages" can also be a term of the art. And of course, the phrase "to which this insurance applies" means that the policy covers what it covers and doesn't cover what it doesn't cover.

The insuring agreement also states that the policy doesn't cover exclusions, which are listed elsewhere in the policy; that it provides coverage up to the policy limits, which are listed elsewhere in the policy; and so on.

Although every word of an insurance policy can be and probably has been litigated, disputes over the insuring agreement generally focus on the meaning of the word "occurrence," which might or might not actually appear in the insuring agreement. I will discuss some of those disputes in future posts. (Additionally, not all policies are occurrence based. In a different future post I will explain the difference between occurrence based and claims based policies.)

Appeals Court holds that insured's failure to cooperate with examination under oath discharges insurer's obligations

Mike Tracy at Rudolph Friedmann LLP brought to my attention a ruling handed down by the Massachusetts Appeals Court on Friday. In Hanover Ins. Co. v. Cape Cod Custom House Theater, Inc., the Appeals Court held that an insurer's failure to cooperate with an examination under oath excuses an insurer from its obligations under the policy, even if the insurer was not prejudiced by the lack of cooperation.

In Hanover the insured sought coverage under a business owner's policy for a break-in at the insured's place of business. After an investigation the insurer reasonably suspected that the break-in might be an inside job, and requested that the insured submit to an examination under oath.

The insured did not appear at the first scheduled examination, and on the advice of counsel refused to answer material questions at the next two examinations.

The trial judge ruled that the insured had materially breached the insurance contract, and that such breach had prejudiced the insurer. However, the trial court declined to relieve the insurer of its obligations under the policy, stating that the prejudice could be cured by an order requiring the insured to pay the attorney's fees of the insurer.

The Appeals Court reversed. The Appeals Court held that an insured's wilful, unexcused refusal to comply with a reasonable request for an examination under oath consititutes a material breach of a condition precedent to the insurance contract and discharges the insurer's obligations under the contract. The Appeals Court stated that this holding is an exception to the general rule that the insurer must show that it was prejudiced by the insured's breach of contract before it is excused from its obligations under the policy.

Laws that help you if your insurer is acting in bad faith

I published this post yesterday, but have revised it thanks to some comments from Andrew Caplan, a partner at Burns & Levinson, http://www.burnslev.com/, regarding some overgeneralizations in my original post.

Massachusetts has a number of consumer-friendly laws, but you have to know how to use them for them to be of use to you.

Mass. Gen. Laws ch. 176D § 3(9) makes it unlawful for an insurer to use such tactics as ignoring communications from an insured with respect to a claim; failing to to make a prompt and fair settlement offer where claims are reasonably clear; or failing to provide a prompt and reasonable explanation of the reason for a denial of a claim.

With respect to insureds who are individuals (such as people making a claim under their homeowner's policy or personal automobile policy), a violation of 176D is also a violation of Mass. Gen. Laws ch. 93A, the Massachusetts consumer protection statute. Where the insured is a business, trial courts generally consider a violation of 176D to be sufficient proof of a violation of 93A, but are not required to do so.

When an insurer violates ch. 93A it is liable for the insured's court costs and attorney's fees, and may also be liable for double or triple damages.

The first step for an individual pursuing a claim for a violation of 176D and 93A is to write a "demand letter." The insurer has thirty days to respond to a demand letter with a reasonable offer of settlement. If the insurer does not respond with a reasonable offer of settlement within thirty days, it will be liable for double or triple damages if the court finds that the failure to make a reasonable offer was "in bad faith with knowledge or reason to know that the [original] act or practice complained of" was a violation of 93A.

In a future post I will discuss what you should say in a demand letter.

Allocation question certified to Supreme Judicial Court

The United States Court of Appeals for the First Circuit has put hope into the hearts of those of us who deal frequently with questions of allocation of loss. In Boston Gas Co. v. Century Indem. Co., 529 F.3d 8 (1st Cir. 2008), the court certified questions to the Supreme Judicial Court of Massachusetts about how insurance in environmental damage cases should be allocated among insurers and between insurers and insureds.

Allocation is an issue that comes up most frequently in environmental and toxic tort cases, in which damage occurred over years or decades before it was discovered, thereby possibly triggering coverage by many insurance policies. The Boston Gas case is a typical example: over the course of decades, Boston Gas had factories that produced fuel along with hazardous by-products that leached into the environment. During one 18 year period, Boston Gas had insurance with three consecutive insurers. It sought coverage for the environmental damage from one of the insurers. That insurer wants the other two insurers to contribute to the loss. Whether they must do so is a question of allocation.

Another issue that came up in the Boston Gas case is whether coverage is triggered separately for each policy year. That issue is significant because Boston Gas had a yearly self-insured retention (a deductible) of $100,000. If each policy year is triggered separately, then Boston Gas will have to contribute several deductibles instead of just one.

There are numerous other issues with respect to allocation, from how to deal with periods where the insurance company that provided coverage no longer exists; to how to divide coverage where more than one insurer covers the same policy year; to how to allocate loss among insurers with different policy limits; to . . . I could go on and on.

But the answer to every such question that has come up under Massachusetts law, until now, has been: Who knows? The Supreme Judicial Court of Massachusetts has never issued a clear ruling on allocation. Other states are sharply divided on every issue.

The United States Court of Appeals has now asked the Supreme Judicial Court to answer three basic questions:

1. Should a pro rata (all insurers initially contribute) or joint and several (only one insurer initially contributes) allocation method be used?

2. If a pro rata method should be used, which pro rata method?

3. For an insurer who covered the risk for more than one policy period, should only one self-insured retention apply, or should the self-insured retention for each policy period apply?

Although some allocation methods tend to be more helpful to insurers and some more helpful to insureds (always with exceptions, depending on the case), in the long run clarity will help everyone. Here's hoping the Supreme Judicial Court agrees and chooses to answer the certified questions.