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Louisiana High Court Upholds Enforceability of Claims-Made-And-Reported Policy Provisions

Case: Gorman v. City of Opelousas
           Louisiana Supreme Court
           2013-1734 (La. 07/01/14), 2014 La. LEXIS 1573

In Gorman, after an inmate incarcerated at the city jail in Opelousas was allegedly beaten to death by two other inmates, the decedent’s mother filed a survival and wrongful death action against the City of Opelousas and its police department. The City’s insurer, Lexington Insurance Company (“Lexington”), was later identified through discovery and added as a Defendant to the suit pursuant to the Louisiana Direct Action Statute.

Lexington had issued a claims-made-and-reported policy to the City, and Lexington was not named in the suit or otherwise notified of the claim until after the policy period had expired. Lexington sought to have the direct action against it dismissed based on lack of coverage because the claim had not been reported to Lexington within the policy’s stated time limit. The trial court granted Lexington’s motion for summary judgment, dismissing all claims adverse to Lexington. However, the appellate court reversed, finding that under the Louisiana Direct Action Statute, La. R.S. 22:1269, et seq., an insurer could not use the policy’s claims-reporting requirement, even in a claims-made policy, to deprive an injured third party of a right that had vested at the time of injury.

On appeal, the Louisiana Supreme Court reversed, reinstating the trial court’s ruling and holding that the reporting provision of a claims-made-and-reported policy is a permissible limitation on the insurer’s liability as to third parties, which does not violate the Direct Action Statute. The Court reasoned that the time limitations in a claims-made policy are not per se impermissible or invalid as against public policy and, relying on its earlier decision in Hood v. Cotter, 08-0215, 08-0237 (La. 12/2/08), 5 So.3d 819, held that the provisions relating to the making and reporting of claims did not limit the Plaintiff's right to bring suit against the insurer. Rather, the Court found these provisions provided the scope of coverage bargained for by the insured and further that the Direct Action Statute does not extend the protection of the liability policy to risks that were not covered by the policy. “To hold otherwise would effectively convert a claims-made policy into an occurrence policy and change the bargained-for exchange between the insurer and the insured.” Accordingly, the Louisiana Supreme Court reinstated the trial court’s finding that no coverage existed under the Lexington policy because the claim was not timely reported to the insurer during the policy period.

Louisiana federal courts have likewise enforced claims-made-and-reported policy provisions. Grubaugh v. Central Progressive Bank, 2013 U.S. Dist. LEXIS 177466 (E.D. La. 12/18/2013). In Grubaugh, a bank patron pursued a breach of contract and negligence claim against his bank after money was allegedly stolen from his account, but he could not proceed with a direct action against the bank’s insurer because the bank failed to give the insurer adequate notice of the claim. The United States District Court for the Eastern District of Louisiana held that the insured’s failure to timely notify the insurer of the claim barred the third party Plaintiff’s direct action against the insurer. The insurer had issued a claims-made Bankers Professional Liability Policy which provided that “the Insured shall, as a condition precedent to exercising any right to coverage under this Coverage Section, give to the Company written notice of a Claim as soon as practicable, but in no event later than sixty (60) days after the date on which any insured first becomes aware that the Claim has been made.” Notice was not provided to the insurer in the Grubaugh case until long after the 60 day notice period had elapsed.

Relying on the condition precedent language in the Policy, as well as other Louisiana federal court cases, the Court reasoned that to allow the Plaintiff to assert a direct action under these circumstances would expand the coverage of the policy beyond that which the insurer bargained for, such that the Court granted the insurer’s Motion for Summary Judgment and all claims against the insurer were dismissed with prejudice.

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