Superior Court holds that contractual choice of law clause does not apply to case over validity of policy term

Catlin Specialty Insurance issued two consecutive claims-made Professional and Pollution Legal Liability Insurance policies to AMSC and its subsidiary Windtec.  The first policy had a policy period of April 1, 2010 to April 1, 2011.




On December 6, 2010, Ghodawat notified the insured that it was terminating a 2008 license agreement between the two due to technical problems with the wind turbine that was the subject of the agreement and that the insured  had supplied and installed.  Ghodawat leveled an accusation of gross negligence and stated that it would pursue a claim unless an amicable resolution was reached.  Settlement discussions followed in February 2011. 




In the meantime, the insured submitted an application for a second year of coverage with Catlin.  In the application it denied any claim, suit, notice or action had been brought or that it was aware of any other circumstances or incidents which may result in a claim being filed against it.  A new policy was issued without Catlin being informed of the Ghodawat allegations.




On May 12, 2011 Ghodawat commenced arbitration proceedings against the insured.  The insured requested coverage from Catlin. 




In Catlin Specialty Is. Co. v. Am. Superconductor Corp., 2014 WL 840693 (Mass. Super.), the Superior Court held that there was no coverage for the claim under either policy because the policy provided coverage only if a claim was both made and reported during the same policy period.  The claim was made in the first policy period and reported in the second policy period. 




The court noted that the purpose of the requirement that notice of a claim be given within the policy period is fairness in rate setting.  Therefore an inquiry into whether an insurer has been prejudiced with respect to the particular claim, relevant to an occurrence policy, is irrelevant to a claims-made policy. 


AMCS argued that under New York law coverage can be denied for breach of the notice provision only if there is prejudice.  The court did not reach that issue because it held that under Massachusetts conflict of law doctrine Massachusetts law applies to the coverage dispute. 


The court held that a choice of law clause in the policies, providing that the "policy shall be subject [to] interpretation under the law of the State of New York" did not apply because the disputed issue is not one of policy interpretation but the validity of  the policy clause requiring that claims be made and reported in the policy period. 

Superior court holds that insurer's mistaken belief that one policy period applies does not estop it from recovery under the correct policy period

Jacob Hanks suffered brain damage as a result of complications during his birth at UMass Medical Memorial Center, an affiliate of UMMHC. For some reason his parents filed three separate actions against UMMHC personnel in three different years. Those claims settled for $4.9 million. Defense costs totalled $1,034,140.

UMMHC had claims-made insurance policies. Its primary provider was CPAC, a captive insurer of UMMHC. UMHHC's excess policies were with other carriers.

In a claims made policy the policy providing coverage is the one in effect when the insurer was notified of the claim. (This is in contrast to an occurrence policy, in which the policy providing coverage is the one in effect when the underlying incident occurred.)

While the lawsuits were pending, UMMHC believed it had given notice of the claim to the excess insurers during the 2003-2004 policy period, when the CPAC policy had a limit of $5 million. It later came to light that the excess carriers may have been notified in the 2001-2002 policy period, when the policy limit was $2.5 million.

UMMHC then sued the excess carriers to recover the additional $2.5 million, the difference between the underlying limits of the two policy years.

In UMass Memorial Health Care, Inc. v. Lexington Ins. Co., 2010 WL 5071868 (Mass. Super.) the Massachusetts Superior Court ruled on the motion for summary judgment of excess carrier First Specialty.

First Specialty argued that UMMHC had suffered no loss within the meaning of the policies because between CPAC and the excess carriers it actually received more than the loss amount.

UMMHC responded that amounts paid by CPAC are not a recovery by UMMHC, because UMMHC funds CPAC itself and is essentially self-insured.

The court held that under the language of the policy, whether loss below the excess policy was paid by a captive insurer, self-insurance, or a regular insurer was irrelevant.

The court held, however, that indemnity under an underlying policy is not a recovery for the purposes of determining UMMHC's loss, because doing so would count the same amount twice -- first as the underlying policy limit and then as a recovery.

It also held that UMMHC did not "elect" to use the later policy period; it merely made a claim under the policy it believed applied. In fact, the earlier policy applied, and First Specialty's obligations needed to be determined under that policy.

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.