While insurance policies are executed for the benefit of all injured persons, such protection is limited by the terms and limits of the policy. On July 1, 2014, the Louisiana Supreme Court in a 4-3 decision, held that the reporting provision in a claims-made-and-reported policy is a permissible “term and limit” on the insurer’s liability as to third parties and does not violate the Louisiana Direct Action Statute, La.R.S. 22:1269, which affords a victim the right to sue the insurer directly when a liability policy covers a certain risk. Joyce Gorman v. City of Opelousas, 2013-1734 (La.7/1/14). Under a claims-made-and-reported policy, the event and peril insured against is based on making and reporting of the claim within the period specified by the policy.
In Gorman, a personal injury and wrongful death lawsuit arising out of a wrongful act that occurred in September 2009 was timely filed against the City of Opelousas in September 2010. After discovering the identity of the City’s liability insurer in discovery, the plaintiff filed an amended petition for damages in September 2011, naming Lexington Insurance Company as a defendant pursuant to the Louisiana Direct Action Statute. The Lexington liability insurance policy at issue was effective from April 17, 2010 – April 17, 2011, and had a retroactive date of April 17, 2005. The pertinent terms of the policy obligated Lexington to pay claims on behalf of the City if three conditions occur:
1) the wrongful act occurs on or after the retroactive date of the policy, but before the end of the policy period – (this condition was met);
2) the claim for the wrongful act is first made against the City during the policy period – (this condition was met); and 3) the claim is reported to Lexington in writing during the policy period (this condition was not met because the CIty failed to notify Lexington of the claim).
The majority held that the City’s Lexington insurance policy was not effective because the claim had not been reported to Lexington within the applicable policy period. Brushing aside the harsh penalty faced by the City’s personal injury and wrongful death victim due to the City’s blatant failure to timely notify its insurer of the pending claim, the majority reasoned as follows:
We recognize that an injured third party rarely has knowledge of the identity of the insurer of the party responsible for an injury, making it nearly impossible for an injured third party to give notice to the insurer. Rather, the injured third party generally has to rely on the insured, which has an interest in ensuring the availability of the coverage it purchased, to comply with the reporting provision in its policy. Although we can contemplate no logical reason why the City would not report a claim for which it apparently purchased insurance coverage, we decline, under the facts of this case, to hold the insurer liable for the City’s failure to report the claim as required by the Lexington policy. A contrary finding would, where there is no evidence of fraud or collusion, punish the insurer for the inactions of its insured.
The three dissenters did not believe that a claims-made insurer should be able to raise, in an action by the victim of the insured’s tort, the defense of a non-prejudicial failure of the timely notified insured to give notice to the insurer during the policy period. The dissenters believed that the notice provision was not a “term and limit” of the policy and believed that a third party victim, who is denied coverage under a claims-made policy because the timely notified insured failed to notify the insurer timely, should be able to resort to the public policy provisions of the Direct Action statute to obtain coverage. The notice requirement conflicts with the public policy and intent of the Direct Action statute and effectively restricts the vested rights of injured parties by allowing coverage to be defeated in an otherwise timely and valid claim when an insured without good cause blatantly fails to give notice to its insurer:
The provision in the Direct Action statute prohibiting compliance with terms and limits “in violation of the laws of this State” likewise restricts the ability of the contracting parties to limit the tort victim’s right of action against the insurer. Here, the notice requirement coupled with the insured’s blatant and unjustified failure to provide notice would not only limit, but effectively destroy the tort victim’s right of action in an otherwise timely filed suit, and as such, it should be void as against the public policy provisions of our Direct Action statute.