The California Court of Appeal has held that, to avoid an inequitable forfeiture, a lawyer was excused from his failure to report a claim to his professionally liability insurer within the policy period, despite the fact the conditions of the policy provided coverage only for “claims made and reported” during the policy period. ( Root v. American Equity Specialty Ins. Co. (2005) 130 Cal.App.4th 926)
Facts
American Equity issued a professional liability policy to Attorney Walter Root. The policy provided coverage for “claims made and reported” to American Equity from February 28, 1998 to February 28, 1999. The policy required Root to report a claim within the policy period as a condition precedent for coverage.
On February 25, 1999 (three days before the expiration of the policy), a reporter called Root and asked him to comment on a malpractice suit filed by Root’s former client. Root thought the call was a prank, since he had obtained a $2.75 million settlement for the client.
Root went on a short vacation and returned on March 2, 2005. At that time, he read a news article about the malpractice suit and realized the call a few days earlier was not a prank. Root immediately notified American Equity about the suit. However, American Equity refused to defend the suit because Root had failed, by two days, to report the claim within the policy period.
Holding
Under Civil Code section 3275 and under common law, a court may excuse compliance with a condition of coverage when enforcement of that condition results in an inequitable forfeiture. The Court of Appeal held that the reporting requirement of the American Equity policy operates as a forfeiture because it removes from coverage a claim that otherwise would be covered, based solely on an action the insured does not take.
The Court concluded enforcement of the reporting requirement was inequitable under these facts because: (1) Root missed the reporting deadline by only two days; (2) he had a short amount of time (less than 2 business days before expiration of the policy) to investigate the basis of the reporter’s phone call; (3) he reported the claim to American Equity the same day he read about it in a legal journal; and (4) American Equity gave Root no opportunity to purchase an extended “tail” period to report late-in-the-policy claims. The Court did not base its decision on the “notice prejudice” rule that is applicable to “occurrence-based” liability policies.
Comment
This case is significant because it essentially allows for the possibility that an insured can circumvent a “claims made and reported” clause by offering a reasonable excuse for failure to comply with the clause. Of course, the issue of whether the insured’s failure to comply with the condition will result in an inequitable forfeiture often will involve a question of fact that a court will have to decide on a case-by case-basis.