Chiara Tondi Resta is an associate at Wiley Rein LLP in Washington, D.C. where she is a part of the firm’s Insurance Group. She represents insurers in connection with coverage issues and disputes arising under various types of insurance policies, including General Liability, Directors & Officers, Professional Liability, and Cyber insurance policies. She advises on the applicability of various policy exclusions and conditions, and represents insurers in coverage litigation on those issues. Chiara earned her law degree from the University of Virginia School of Law.
The Southern District of New York recently held that an insurer’s late-reporting defense is not subject to waiver under claims-made-and-reported policies. Hunt Constr. Grp. Inc. v. Berkley Assurance Co., No. 19-cv-8775, 2021 WL 4392520 (S.D.N.Y. Sept. 24, 2021). The ruling recognizes the fundamental importance of reporting requirements in claims-made-and-reported policies and represents an important win for insurers on a hot issue. The ruling has been appealed to the Second Circuit, providing an opportunity to cement the federal courts’ view of New York law on the differences between occurrence, claims-made, and claims-made-and-reported policies.
The insured, Hunt Construction Group, Inc. (“Hunt”), was a general contractor that purchased claims-made-and-reported errors and omissions policies. When the contractor was sued for alleged mismanagement of a construction project, it notified its insurer, Berkley Assurance Company (“Berkley”). But the notice was late according to the policy’s reporting requirements. The claim was reported in the policy period after the claim had been made. Berkley initially agreed to defend the contractor, subject to a reservation of rights, but seven months later, it denied coverage on the ground that the insured had not provided timely notice of the claim.
In subsequent coverage litigation, Hunt argued that Berkley had waived the late-notice defense because New York law requires insurers who “gain actual or constructive knowledge of a late-notice defense to immediately raise the defense or risk waiving it.” The court initially sided with the contractor; however, the court did not consider that the policy at issue was a claims-made-and-reported policy.
On a motion for reconsideration, the court ruled in Berkley’s favor, holding that the late-notice defense is not subject to waiver where the timing of claim reporting “establishes the contours of policy coverage,” as in claims-made-and-reported policies. The court noted that New York case law acknowledges the unique function of notice requirements in claims-made-and-reported policies. In that context, “the governing rule is that ‘where the issue is the existence or nonexistence of coverage,’” as is the case when late notice is at issue under a claims-made-and-reported policy, “‘the doctrine of waiver is simply inapplicable.’”
Hunt appealed to the Second Circuit the district court’s decision on waiver (and on other substantive issues not addressed here). The parties completed briefing in May 2022 and are awaiting the Second Circuits’ ruling.
The Insured’s Argument on Appeal
Hunt’s appeal takes issue with the District Court’s views of New York waiver law, memorialized in Albert J. Schiff Ass. Inc v. Flack, 51 N.Y.2d 692 (1980). Hunt argues that Schiff “distinguished between instances where the doctrine of waiver is ‘inapplicable’—i.e., ‘where the issue is the existence or nonexistence of coverage’—and situations where waiver has traditionally applied—such as ‘failure to give timely notice of a loss’” under claims made policies. See Appellate Brief at 30-31.
Hunt argues that Schiff does not permit an insurer to evade its promised coverage by belatedly arguing that its insured failed to take certain actions as a prerequisite thereto.” See Appellate Brief at 31-32. That is because Schiff “draws a distinction between the substantive risks insured by a policy—which cannot be waived—and the insured’s breach of policy conditions that the insured must satisfy to secure coverage.
Since Hunt claims that it violated a condition to coverage, and not that it is seeking to change the nature of coverage or the substantive risks insured against, Hunt urges that under Schiff, Berkley can—and indeed has—waived its late notice defense. In support, Hunt points to the policy’s notice requirements that are expressly described in the policy as “conditions,” and by arguing that the notice requirements are merely technical requirements in the policy, not a fundamental quality of the insurance coverage purchased.
The Insurers’ Response on Appeal
Berkley’s response focuses on a key doctrine of New York law articulated in Schiff—that “where the issue is the existence or nonexistence of coverage (e.g., the insuring clause and exclusions), the doctrine of waiver is simply inapplicable.” See Berkley’s Appellate Response at 38. Berkley reasons that because timely reporting of claims in a claims-made-and-reported policy is a “prerequisite for the existence of coverage under the Policies’ insuring clause”—that is, it is an element that determines the scope of coverage available—there can be no waiver of coverage when it comes to late notice. Id.
Berkley points out that Hunt has conflated two different policy provisions. While Hunt argues that the coverage denial was based on a policy condition that requires prompt notice of claims, Berkley’s denial was not based on the mere fact of a delay in the reporting; rather, it was based on the “complete failure . . . to report a claim during the Policy Period in which it is first made.” Id. at 39. That is, while an insurer can waive its coverage defense where notice was delayed but still made during the relevant policy period, it cannot waive the defense where the notice delay means the claim is never noticed during the relevant policy period. Id. at 40. In that instance, the claim “falls outside the scope of coverage as defined in the Insuring Agreement, and no waiver can bring the claim back into coverage.” Id.
Berkley explains that this difference is based on the nature of coverage offered under claims-made-and-reported policies. “Because the timing of notice is the trigger for coverage in a claims made policy and is thus material to the existence or nonexistence of coverage, the waiver doctrine cannot apply because it would go beyond merely extinguishing a defense to underlying coverage, and cause [an insurer] to extend coverage beyond the period for which the policy provides.” Id. at 40-41.
The district court’s ruling in Hunt represents a big win for insurers in an important jurisdiction because New York’s late notice law recently has favored policyholders. In particular, in 2009 New York passed a statute that adopted the notice-prejudice rule for some professional liability policies. The Hunt court’s original ruling created yet another barrier for insurers on late-notice, and it was indicative of how courts may fail to recognize the fundamental differences between claims-made-and-reported policies and occurrence or claims-made policies when it comes to their reporting requirements.
But the Hunt court’s ruling on reconsideration provides some reprieve to insurers. By holding that the reporting requirement cannot be waived, the district court acknowledged that reporting requirements of claims-made-and-reported policies are a fundamental quality of the coverage offered, and that thus they allow insurers to set their reserves more accurately and more clearly define the risk they assume. Berkley’s arguments on appeal take this one step further. It notes that waiver law also distinguishes between claims-made policies more generally, and claims-made-and-reported policies, which have slightly different reporting requirements. Although both policies only offer coverage for claims made against the insured during the policy period, only claims-made-and-reported policies also required the claim to be reported to the insurer during the same policy period as a part of the policy’s insuring clause. This is separate from the prompt notice provision that both types of policies usually have. The additional requirement of claims-made-and-reported policies plays an important role for insurers in narrowing the potential for risk, because it creates a guarantee that only claims made and reported during the same policy period could implicate its payment obligations.
This is precisely the point that Berkley emphasizes in its response to Hunt’s appeal. Hunt incorrectly sees no distinction for waiver purposes between (1) a delay between a claim taking place and the reporting of it, and (2) a delay that causes a claim to be reported during a different policy period than when it was made. But Berkley acknowledges that in the first scenario, waiver of the late notice defense is permissible—under both claims-made and claims-made-and-reported policies—because the delayed notice does not affect the scope of coverage offered. See Insurer’s Appellate Response at 40. The prompt notice requirement is a condition to coverage.
But in the second scenario, allowing waiver of the late notice defense where a claim is not reported until the policy period after the period during which it was made would “go beyond merely extinguishing a defense to underlying coverage, and cause [an insurer] to extend coverage beyond the period for which the policy provides.” Id. at 40-41. It would force insurers to offer coverage where none had actually been purchased, changing the fundamental nature of the policy from claims-made-and-reporting to a claims-made policy. Reporting no longer would define the scope of coverage.
The district court’s ruling in Hunt acknowledges these important considerations, although not in so many words. And the ruling only expressly notes the difference between the reporting requirements of claims-made-and-reported policies and occurrence policies; it does not address the distinction between claims-made policies and claims-made-and-reported policies. Ironically, Hunt’s appeal forced Berkley to articulate the nuances of this issue even more clearly than the district court did, and expressly discussed the doctrine with respect to both types of policies. By forcing Berkley to spell out this distinction on appeal, Hunt may have helped Berkley not only secure a win on appeal, but also by giving the appellate court the opportunity to adopt Berkley’s reasoning, which is much clearer and more explicit than the district court’s current holding. Such an outcome would provide insurers and insureds clarity on a common, and often contentious, coverage issue.
The Hunt district court’s ruling joins a line of other cases across jurisdictions acknowledging the special nature of claims-made-and-reported policies, specifically in the context of waiver and late notice. It also reinforces New York’s previously existing case law on this issue, which the Hunt court acknowledged on reconsideration. Many of these cases, including those cited by Berkley in its appellate response, make the same argument that Berkley has made in this case. Berkley rightly points out that, pursuant to these cases, “New York’s intermediate courts—and federal courts applying New York law—have all reached the same conclusion . . . in the context of claims-made-and-reported insurance policies, where the timing of claim reporting establishes the contours of policy coverage, an insurer’s late-reporting defense is not subject to waiver.” See Berkley’s Appellate Response at 44-45. Berkley also emphasizes that “Hunt has never been able to identify ‘any case holding that an insurer waived such an argument under a claims-made-and-reported policy.’” Id. at 43. With this in mind, the appellate court should have ample precedent to rely on to find support for the district court’s ruling.
Although the district court’s ruling is an important win for insurers, they are not out of the woods yet. The ruling has been appealed and is now fully briefed. While the parties’ briefing suggests that Berkley has a good chance of success, how the Second Circuit views the issue remains to be seen.
 See e.g., Sollek v. Westport Ins. Corp., 2012 U.S. Dist. LEXIS 157649 (S.D. Miss. Nov. 2, 2012) (holding that the notice provisions of claims-made-and-reported policies “define the scope of coverage by providing a certain date after which an insurer knows it is no longer liable under the policy. Thus, allowing waiver or estoppel to nullify these requirements would fundamentally change the nature of the insurer’s risk. It would likewise expand coverage beyond the scope of the bargain. Neither waiver nor estoppel create coverage in this context”); Or. Sch. Activities Ass’n v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 279 Fed. Appx. (9th Cir. 2008) (holding that waiver of late notice is not applicable with respect to claims-made-and-reported policies because “under Oregon law, waiver is not available to prevent the insurer from asserting a policy defense if the defense is a condition of coverage; otherwise the plaintiff would be able to create coverage through a waiver argument where none existed,” and “because notice under a claims-made-and-reported policy is the very act that triggers coverage…it is not a defense that can be waived, even if the insurer also asserts other defenses”).
 See e.g., Berkley Assurance Company v. Hunt Construction Group, Inc., 465 F. Sup. 3d 370 (S.D.N.Y. 2020) (noting that the court could not find any case holding that an insurer waived its late notice defense under a claims-made-and-reported policy); Calocerinos & Spina Consulting Engineers, P.C. v. Prudential Reinsurance Co., 856 F. Supp. 775 (W.D.N.Y. 1994) (noting that “because the timing of notice is the trigger for coverage in a claims made policy and is thus material to the existence or nonexistence of coverage, the waiver doctrine cannot apply”); McCabe v. St. Paul Fire & Marine Insurance Company, 914 N.Y.S.2d 814 (4th Dep’t 2010) (finding that “the overwhelming weight of authority holds that such an argument [i.e., denying coverage for late notice] is not subject to waiver because the doctrine of waiver ‘may not operate to create coverage where it never existed’”); Certain Underwriters at Lloyds London v. Advance Transit Company Incorporated, 188 A.D.3d 523 (NY. App. Div. 2020) (affirming the lower court’s ruling that late notice of a claim under a claims-made-and-reported policy barred coverage, even though the insurer initially defended subject to a reservation of rights).