Pennsylvania Supreme Court Upholds Denial of Coverage for Late Notice

May 7, 2009

The Property Casualty Insurers Association of America (PCI) is trumpeting a decision by the Pennsylvania Supreme Court that it says upholds the importance of enforcing the plain meaning of insurance contract language.

The Supreme Court’s decision in Ace American Insurance Co. v. Underwriters at Lloyds and Cos. affirmed a lower court ruling which held that an insurer need not demonstrate it would be harmed when denying coverage under a “claims made” policy based upon late notice.

ACE purchased a claims-made-and-reported policy with Lloyds and the terms specifically stated that ACE must report a claim as soon as practicable and in no event later than 90 days after the expiration date of the policy. ACE sued when Lloyd’s refused to pay a $37.2 million claim that arose from a bad faith claim lodged by its insured, Refuse Fuels. The denial was based upon ACE’s failure to timely comply with the Errors and Omissions policy’s specific notice of claim requirement for claims that were reasonably anticipated to exceed $4 million.

ACE argued that an insurer cannot deny a claim based on late notice unless it can show harm or prejudice in a claims made situation, as would be the case in an occurrence policy. In almost every state, if an insurer denies a claim based on late notice under an occurrence policy, the law requires them to demonstrate that they were prejudiced in some way by the insured’s failure to timely file that claim. Only two courts have ruled that prejudice is required in a claims made situation.

The Pennsylvania court remained in the mainstream by rejecting the ACE’s argument which would have would have resulted in the extension of coverage beyond the reporting period, PCI said.

“Such an extension of coverage would be contrary to the fundamental purpose of a claims-made-and-reported policy and provided coverage to an insured for which it neither bargained nor paid,” said Ann Spragens, senior vice president, secretary and general counsel for PCI. “Claims made insurance policies provide an insurer a clear and certain cut-off date for coverage. In return, the insured typically pays a lower premium. Based on actuarial data, a claims made policy can be as much as 32 percent cheaper than an occurrence policy premium, according to public records cited in our brief.”

She added that “a reversal of the lower court’s decision could have had a significant impact on professional lines business and potentially led to higher costs for professionals who are typically insured under claims made policies, such as accountants, architects, doctors and lawyers doing business in the state.”

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