Tuesday, October 19, 2010

U.S. District court holds that Automatic Extended Reporting Period requires that claims be reported but not made during extended period

NEET is a small environmental consulting business. It purchased from American Safety consecutive claims-made policies, with the policy periods ending on March 2 of each year.

A claims-made policy provides coverage if a claim is made and reported during the policy period, regardless of when the loss occurred. That's in contrast to the more usual occurrence-based policy, which provides coverage if the loss occurred during the policy period, regardless of when the claim was made.

The policies contained an Automatic Extended Reporting Period which provided that they will cover a claim made and reported to American Safety within 30 days of the end of the policy period, but only if no other similar insurance is in force during that time.

In February, 2008, NEET received a demand that it pay for remediation of an oil spill caused by heating oil tanks NEET allegedly installed improperly. NEET forwarded the demand detter to its insurance agent on March 6, 2008.

In a motion for summary judgment American Safety argued that for the Extended Reporting Period to apply the claim had to be both made and reported to the insurer during the 30 days after the policy expired. In New England Environmental Tech. v. Am. Safety Risk Retention, __ F. Supp. __, 2010 3622250 (D. Mass.) the court disagreed, holding that the policy could reasonably be construed to require only that the claim be reported to the insurer within 30 days after the policy expired. It also held that denying coverage to claims reported within the 30 day period would not assist the goal of claims-made policies of setting future premiums.

American Safety then argued there was no coverage because NEET had "other similar coverage" (the next consecutive American Safety policy) in effect for the policy period beginning on March 3, 2008. In somewhat convoluted logic the court held that the consecutive policy was not "other similar coverage." The heart of its decision is that failure to provide coverage because a consecutive policy was in place "is counterintuitive to a reasonable insured."

The court granted summary judgment to American Safety on NEET's 93A and 176D claims, on the grounds that American Safety's interpretation of the policy was plausible and there was no evidence it had acted in bad faith.

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