Court of Appeals holds that insurers who issued claims-made policies are not required to show prejudice as a result of late notice of claim

This is my last post on Gargano v. Liberty Int'l Underwriters, Inc., in which the United States Court of Appeals held that insurers could under claims-made policies claims that were not both made and reported during the policy period.

The plaintiff argued that the insurers must demonstrate prejudice from his untimely notice in order to escape their coverage obligations. Although with occurrence based policies it is the rule in Massachusetts that an insurer must show prejudice from late notice, the court held that the same is not true of claims-made policies. To do so "would defeat the fundamental concept on which claims-made polices are premised."

Some occurrence issues

In a previous post I discussed occurrence-based policies. Basic to those policies is what the word "occurrence" means. Although policy definitions of occurrence have some variation, a typical definition is "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."


In the vast majority of cases, whether or not something is an occurrence is straightforward. A car accident is an occurrence. A doctor accidentally amputating the patient's wrong leg is an occurrence. A power saw malfunctioning and injuring someone's hand is an occurrence. A fire is an occurrence. An assault by an insured person is not an occurrence; but an assault by an employee of an insured business may be an occurrence.


Not surprisingly, disputes over whether or not an event was an occurrence have to do with the intentions of the insured. If the insured expected or intended to cause an injury, there is no occurrence.


About a year ago, in the case of Terra Nova Ins. Co. v. Fray-Witzer, the Supreme Judicial Court of Massachusetts addressed the question of whether unsolicited faxes sent by an auction company, Metropolitan, were an occurrence. Metropolitan had purchased and faxed, through a contractor, unsolicited advertisements, including 360,000 such advertisements to Massachusetts fax machines. Unfortunately for Metropolitan, it is illegal under federal and Massachusetts law to send unsolicited faxes. When Metropolitan was sued in a class action lawsuit over the faxes, it sought insurance coverage from its commercial general liability insurers.


The Supreme Judicial Court of Massachusets decided that the sending of unsolicited faxes were not an occurrence. The class action plaintiffs (who would benefit from the insurance coverage) argued that although Metropolitan may have intended to transmit the advertisements, they did not intend to violate the law. The court disagreed with that argument. It stated that the injury to the class members (the consumption of paper and toner and unwanted use of the fax machines) was an inherently foreseeable result of Metropolitan's conduct.

In future posts I will discuss other issues raised by the definition of occurrence.

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.