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BROWN–SPAULDING & ASSOCIATES, INC., Cross-complainant and Appellant, v. INTERNATIONAL SURPLUS LINES INSURANCE COMPANY et al., Cross-defendants and Respondents.
Brown–Spaulding & Associates, Inc., (Brown–Spaulding) appeals from a summary judgment granted against it and in favor of respondents, International Surplus Lines Insurance Company (ISLIC) and Crum & Forster Managers Corporation (Crum & Forster).1 In this case we decide that in a “claims made” insurance policy for professional liability, a mandatory requirement that the insured report a claim within the policy period is against public policy and unenforceable.
I
On appeal from the grant of a summary judgment motion we conduct an independent review of the supporting and opposing papers submitted to determine their construction and effect. (AARTS Productions, Inc. v. Crocker National Bank (1986) 179 Cal.App.3d 1061, 1064, 225 Cal.Rptr. 203.) Additionally, the moving party's affidavits are strictly construed while those of the opposing party are liberally construed. (Miller v. Bechtel Corp. (1983) 33 Cal.3d 868, 874, 191 Cal.Rptr. 619, 663 P.2d 177.) Doubts as to the propriety of summary judgment are resolved against the granting of the motion. (Becker v. IRM Corp. (1985) 38 Cal.3d 454, 458, 213 Cal.Rptr. 213, 698 P.2d 116.) Summary judgment is properly granted only when the evidence presented by the moving party establishes that there is no material issue of fact and that the moving party is entitled to judgment as a matter of law. (Code Civ.Proc., § 437c, subd. (c); Lipson v. Superior Court (1982) 31 Cal.3d 362, 374, 182 Cal.Rptr. 629, 644 P.2d 822.)
We apply these principles to the evidentiary showing made to the trial court below. Brown–Spaulding, an insurance brokerage firm, contracted with ISLIC for professional liability insurance for the period from January 1, 1984, through December 31, 1984. The insurance policy covered generally Brown–Spaulding's errors and omissions in connection with its professional services rendered as an insurance agent and broker. Section I. of the policy, titled “Coverage—Errors and Omissions Liability,” provided that ISLIC agreed “[t]o pay on behalf of the insured all sums which the insured shall become legally obligated to pay as compensatory money damages as a result of claims first made against the insured and reported to the company during the policy period by reason of any act, error or omission in professional services rendered or which should have been rendered by the insured․” (Emphasis added.)
Brown–Spaulding failed to obtain a pollution liability insurance policy as requested by its client Robert Brower, a New Jersey gas station owner. In early 1984 Brower began receiving demands from the State of New Jersey requiring that he pay for investigation and correction of pollution of land which allegedly arose out of the operation of one of his gas stations. In April 1984 he reported these demands to Brown–Spaulding. Brown–Spaulding submitted the claim on behalf of Brower to his general liability insurance carrier, The Hartford. On October 17, 1984, The Hartford informed Brower that the claim was not covered by this policy. Although Brown–Spaulding interpreted this denial of coverage as definite, it advised Brower to resubmit the claim to The Hartford. It also informed Brower that its errors and admissions policy would cover any loss he suffered as a result of its negligence in failing to secure coverage for him. In turn, Brower informed Brown–Spaulding that he would look to it if Hartford did not provide coverage. The Hartford denied coverage again on January 5, 1985.
Brown–Spaulding did not renew its ISLIC policy, which expired on December 31, 1984, but on January 21, 1985, it did report the claim being made against it by Brower to ISLIC. Brown–Spaulding also reported Brower's claim against it to Employers Reinsurance Corporation (Employers), its new insurer for professional liability insurance for the year commencing January 1, 1985. ISLIC denied coverage for the claim being made against Brown–Spaulding by Brower on the basis that the claim was not reported to ISLIC by Brown–Spaulding within the policy period. Employers also denied coverage, and rescinded its policy for the reason that Brown–Spaulding's application for insurance had omitted mention of Brower's claim. The recission of the policy by Employers is not involved in this appeal.
This case commenced with a declaratory relief action brought by Employers, in which Brown–Spaulding and its principals, ISLIC, Crum & Forster, and Brower were named as defendants. Brown–Spaulding filed a cross-complaint against Employers, The Hartford and ISLIC for indemnity and damages for breach of contract and breach of the covenant of good faith and fair dealing.
ISLIC moved for summary judgment on the cross-complaint on the ground that, as a matter of law, its insurance policy provides no coverage to Brown–Spaulding for the claim being made against Brown–Spaulding by Brower. Summary judgment was granted in favor of ISLIC and against Brown–Spaulding. This appeal followed.2 3
II
We have determined that a notice provision in a “claims made” insurance policy requiring a claim made against the insured to be reported during the policy period is against public policy and unenforceable. Further, we have concluded Brown–Spaulding provided notice to ISLIC within a reasonable time after the policy expiration date. Accordingly, the judgment for ISLIC must be reversed.
It is a well-established principle that an insurer has the right to limit policy coverage in plain and understandable language and that it may limit the nature of the risk it undertakes to assume. (Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 432, 296 P.2d 801; Fireman's Fund Ins. Co. v. Fibreboard Corp. (1986) 182 Cal.App.3d 462, 466, 227 Cal.Rptr. 203; VTN Consolidated, Inc. v. Northbrook Ins. Co. (1979) 92 Cal.App.3d 888, 892, 155 Cal.Rptr. 172; Chamberlin v. Smith (1977) 72 Cal.App.3d 835, 850, 140 Cal.Rptr. 493.) Nevertheless, an insurance company's limitation of coverage must conform to the law and public policy. (Lumberman's Mut. Cas. Co. v. Wyman (1976) 64 Cal.App.3d 252, 259, 134 Cal.Rptr. 318.) Furthermore, it is also well settled that insurance contracts, as contracts of adhesion, are subject to careful judicial scrutiny to avoid injury to the public. (See Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 882, 27 Cal.Rptr. 172, 377 P.2d 284.) In the consideration of adhesion contracts, the courts have a heightened responsibility to prevent the marketing of policies that provide unrealistic and inadequate coverage.
Any portion of an insurance contract which is violative of public policy is not enforceable. (Ritter v. Mutual Life Insurance Co. (1898) 169 U.S. 139, 158, 18 S.Ct. 300, 306, 42 L.Ed. 693; Sparks v. St. Paul Ins. Co. (1985) 100 N.J. 325, 495 A.2d 406, 412; 6B Appleman, Insurance (1979) § 4254, p. 28, fn. 28; 43 Am.Jur.2d (1982) Insurance, § 260, p. 334; 44 C.J.S., Insurance, § 241, p. 1001.) However, we must apply this principle cautiously in view of the disfavor in the law of a court's interference with the parties' freedom of contract. (See Cal. Const., art. I, § 1; Sparks v. St. Paul Ins. Co., supra, 495 A.2d at p. 412.)
In the area of professional liability insurance, the two most common types of insurance policies offered are the “claims made” (or “discovery”) policy and “occurrence” policy. (Pacific Indemnity Co. v. Imperial Casualty & Indemnity Co. (1986) 176 Cal.App.3d 622, 626, 222 Cal.Rptr. 115; Comment, The “Claims Made” Dilemma in Professional Liability Insurance (1975) 22 UCLA L.Rev. 925.) “ ‘․ A “claims made” policy is one whereby the carrier agrees to assume liability for any errors, including those made prior to the inception of the policy, as long as a claim is made during the policy period. On the other hand, an “occurrence” policy provides coverage for any acts or omissions that arise during the policy period even though the claim is made after the policy has expired.’ ” (Pacific Indemnity Co. v. Imperial Casualty & Indemnity Co., supra, 176 Cal.App.3d at p. 626, fn. 1, 222 Cal.Rptr. 115, quoting Chamberlin v. Smith, supra, 72 Cal.App.3d at p. 845, fn. 5, 140 Cal.Rptr. 493.) In the instant case, ISLIC issued the “claims made” type of policy to Brown–Spaulding.
An underwriter of an occurrence type policy is faced with the possibility of a “tail” that extends beyond the policy period, i.e., a lapse of time between the date of the error and the time when the claim is made. On the other hand, the underwriter of a claims made policy has the advantage of knowing that after the policy's expiration there is no open-ended “tail.” The underwriter knows coverage is only for claims made against the insured during the policy period. Thus, in contrast to occurrence policies, the underwriter of a claims made policy has greater certainty in the calculation of risks and premiums. The underwriter need not consider the possibilities of inflation beyond the policy period in calculating its costs. The primary advantage to the insured from a claims made policy is a lower premium as this type of policy premium is not computed to provide for future claims at an inflated sum. (See Sparks v. St. Paul Ins. Co., supra, 495 A.2d at p. 409; Comment, The “Claims Made” Dilemma in Professional Liability Insurance, supra, at pp. 928–929.)
In general courts have upheld the validity of the claims made policies, recognizing the significant social utility therefrom. (See Zuckerman v. Nat. Union Fire Ins. (1985) 100 N.J. 395, 495 A.2d 395, 400, and cases there cited; Gulf Ins. Co. v. Dolan, Fertig and Curtis (Fla.1983) 433 So.2d 512, 514–515.) With certain restrictions pertaining to notice, a contract for claims made professional liability insurance may be freely entered into in California. (See Ins.Code, § 11580.01.) 4
However, a requirement that the claim be reported to the insurer during the policy period raises serious questions concerning the restrictiveness of the coverage limitation, the impact on the insured's freedom to contract with other insurers, and the potential for harm to the public.
The effect of the notice requirements here is that for those claims made against Brown–Spaulding at or near the expiration date of the policy, Brown–Spaulding enjoys neither the retroactive coverage typically offered in claims made policies nor the prospective coverage offered in occurrence type policies. A claims made policy which requires the insurer to be notified during the policy period severely limits the scope of coverage so that the objectively reasonable expectations of the purchaser of professional liability coverage are not met. An insured, such as Brown–Spaulding, with continuous claims made professional liability coverage, would have a reasonable expectation of continuous protection from liability. However, the reporting requirement effectively precludes coverage for claims made toward the end of the policy period which cannot reasonably be reported until after expiration.
For example, an insured may acquire a “claims made” policy for the first year with carrier “A” and for the second year with carrier “B.” If a claim is made against the insured on December 30 in the first year and reported by the insured on January 2 in the second year, carrier “A” will deny coverage as the claim was not reported in the first year and carrier “B” will deny coverage as the claim was not made against the insured in the second year.
In Sparks v. St. Paul Ins. Co., supra, 495 A.2d at page 408, the New Jersey Supreme Court considered the validity of a claims made policy providing for coverage of only those “claims arising from the performance of professional services subsequent to the retroactive date indicated and then only to claims first made within the provisions of the Policy while this Coverage Form is in force. No coverage is afforded for claims first made after the termination of this insurance unless and to the extent that Reporting Endorsements are purchased․” Because of the special provision concerning the retroactive date, the policy afforded no retroactive coverage during the first year. Coverage provided during the first year was only for errors and omissions that occurred during the policy year and were reported to the company during that year. Policy coverage during the next two years was retroactive only as to negligence that occurred subsequent to the effective date of the policy. (Id., at pp. 408–409.)
The court reasoned that the policy there combined “the worst features of ‘occurrence’ and ‘claims made’ policies and the best of neither. It provide [d] neither the prospective coverage typical of an ‘occurrence’ policy, nor the ‘retroactive’ coverage typical of a ‘claims made’ policy․ [¶ ] The realities of professional malpractice, however, suggest that it would be the rare instance in which an error occurred and was discovered with sufficient time to report it to the insurance company, all within a twelve-month period.” (Sparks v. St. Paul Ins. Co., supra, 495 A.2d at pp. 414–415.) The court held that the definition of such a narrow scope of coverage did not comport with the “objectively reasonable expectations of the purchasers of professional liability insurance” (id., at p. 415) and contravened New Jersey public policy. The court imputed a “right of prospective notification” so that the policy provided coverage commensurate with the insured's reasonable expectations. (Id., at p. 416.)
Similar public policy concerns are raised by the notice provision here insofar as it affects the limitations on coverage. The result of the notice provisions in the policy issued by ISLIC is to deprive Brown–Spaulding of retroactive coverage for claims made against it near the end of the policy period. Such narrow coverage provisions are so oppressive and unfair as to be violative of public policy.
Further, we find the impact of such reporting requirement on the insured's right to contract with other insurers to be contrary to our state's policy of encouraging contractual freedom. An insured concerned about coverage for a claim made against it late in the policy period is effectively relegated to renewing coverage with its current insurer, where such notice requirement is included in the policy. As evidenced by the facts of the instant case, an application for the claims made type of coverage with a different professional liability insurer may be declined where there is a potential outstanding claim. Even if the insured is successful in obtaining other claims made insurance, the new coverage would not apply to a claim made against the insured during the former policy period. Further, an occurrence policy, by definition, would not cover a loss occurring prior to the policy period. Thus, the only manner in which an insured could be certain of uninterrupted liability protection would be to renew the policy with the same carrier. This impermissibly inhibits the freedom to contract.
Furthermore, that the reporting requirement contravenes public policy is demonstrated by the significant potential for harm to the public at large from such contractual provisions. The enforcement of a professional liability policy with such unreasonably restrictive notice provisions would lead to the denial of coverage to those professionals insured, and derivatively, those individuals or entities who have suffered from the insured's negligence.
We therefore conclude that as a matter of law the reporting requirement in ISLIC's insurance policy violates public policy and is unenforceable.
We do not disagree with respondents that the purpose of a notice provision in insurance contracts for accident or loss (casualty) is to permit prompt and adequate investigation of the circumstance. (See Annot., Liability Insurer—Failure to Notify (1984) 32 A.L.R.4th, 141, § 5a.) However, even a claims made policy does not provide such a guarantee. In a professional liability insurance policy for claims made, where retrospective coverage is provided for malpractice which may have occurred prior to the policy period, prompt investigation may not be possible.
III
Respondents argue that any interpretation of the claims made policy which increases the coverage beyond the “claims made and reported” limitation would result in increased costs to insurers and increased premiums to the insureds. Respondents contend that expanded coverage will “[undercut] the reasoning behind ‘claims made and reported’ insurance policies—to insure a limited risk for a lower premium.” Additionally, respondents rely heavily upon Gulf Ins. Co. v. Dolan, Fertig and Curtis, supra, 433 So.2d at pages 515–516, for the proposition that an expansion of coverage beyond that expressly provided for in the policy would be a gift to the insured for which the parties did not bargain. While these arguments present surface appeal, they do not present a complete analysis of the ramifications of the problem.
In the first instance, current premiums for professional liability insurance for claims made and reported policies are artificially low, compared to other policies, due to the insurer's cost savings from declined coverage for those claims made against the insured toward the end of the policy period but not reported until after its expiration. The insurer receives a windfall from the insured's inability to receive indemnification for claims made against it late in the policy period. Additionally, any increase in the uncertainty of forecasting losses and computing premiums is minimal. The number of claims against the insured during the policy period remains the same. It is only the reporting requirement that is changed.
Finally, the opinion in Gulf Ins. Co. is factually distinguishable from the instant case. The Florida Supreme Court upheld the claims made and reported coverage limitation in the professional liability policy in that case, holding that a court may not, as a matter of policy, require an unambiguous policy to be subjected to a reasonable additional period beyond the policy expiration date for the reporting of claims made late in the contract term. The court found that any such expansion of coverage would be tantamount to rewriting the insurance contract between the parties. In support of its holding, the Florida Supreme Court noted that the insured had the option of extending the reporting period by 30 days if it paid an additional premium. The insured chose not to do so and thus received what it had bargained for. (Gulf Ins. Co. v. Dolan, Fertig and Curtis, supra, 433 So.2d at pp. 515–516.)
In the instant case, the policy did not provide for such an extended reporting option. Instead, in section III. it provided for the following “Extended Reporting Period”: “If the company cancels for other than non-payment of premium or refuses to renew, this policy shall be extended to apply to claims first made against the insured and reported to the company during the period of sixty (60) days immediately following the date of cancellation or termination of the policy, but only in respect to acts, errors or omissions occurring prior to the end of the policy period and otherwise covered by this policy. This extended reporting period shall immediately terminate on the effective date and hour of any other insurance which replaces in whole or in part the coverage afforded by such extended reporting period.” (Emphasis added.) Thus, the extended reporting period only applies if the company cancels the policy or refuses to renew and then only if no replacement insurance has been obtained. This provision is of no benefit to an insured, such as Brown–Spaulding, who declines to renew at the end of the policy period.
We appreciate that one of the advantages of the claims made policy is liability coverage for a reduced premium (Comment, The “Claims Made” Dilemma in Professional Liability Insurance, supra, at p. 928) and our decision does not prohibit the issuance of such a policy. However, as demonstrated by the instant case, the security of retrospective coverage afforded to an insured may only be illusory because of reporting requirements. Thus, by our holding today, that a reporting provision in a claims made and reported policy requiring a claim to be reported to the insurer during the policy period is void and unenforceable, no unfairness to insurer or insured enures.5
IV
The summary judgment, including the award of costs, granted in favor of International Surplus Lines Insurance Company and Crum & Forster Managers Corporation and against Brown–Spaulding & Associates, is reversed. Brown–Spaulding to recover costs on appeal.
FOOTNOTES
1. Our rulings in respect to ISLIC also apply to Crum & Forster Managers Corporation.
2. Thomas Brown and Christopher Spaulding, the principals of Brown–Spaulding, were not named as parties in the cross-complaint or in the summary judgment.
3. Appellant's premature notice of appeal purports to appeal from the nonappealable order granting summary judgment prior to entry of judgment. Such notice of appeal is adequate here, in view of our liberal policy favoring the sufficiency of such notice (Cal.Rules of Court, rule 1(a); Roston v. Edwards (1982) 127 Cal.App.3d 842, 846, 179 Cal.Rptr. 830; Helfer v. Hubert (1962) 208 Cal.App.2d 22, 24–25, 24 Cal.Rptr. 900) and by the exercise of our discretion to treat such premature notice of appeal as being filed after the entry of judgment. (Cal.Rules of Court, rule 2(c); see 9 Witkin, Cal.Procedure (3d ed. 1985) Appeal, §§ 412–415, pp. 410–413.)
4. Insurance Code section 11580.01 provides: “(a) A policy insuring against legal liability arising from the rendering of professional services by an insured licensed pursuant to the provisions of Division 2 (commencing with Section 500) of the Business and Professions Code, or Chapter 4 (commencing with Section 6000) of Division 3 of the Business and Professions Code, and which generally limits the coverage thereof to liability for only those claims that are first made against the insured while the policy is in force, shall not be issued or delivered to any person in this state unless the application or proposal therefor complies with subdivision (b) and the policy complies with subdivision (c). [¶] (b) The form of application or proposal for any such policy described in subdivision (a) shall recite prominently and conspicuously at the heading thereof that it is an application or proposal for a claims-made policy. [¶] (c) Each such policy described in subdivision (a) shall contain on the face page thereof a prominent and conspicuous legend or statement substantially to the following effect: [¶] NOTICE [¶] ‘Except to such extent as may otherwise be provided herein, the coverage of this policy is limited generally to liability for only those claims that are first made against the insured while the policy is in force. Please review the policy carefully and discuss the coverage thereunder with your insurance agent or broker.’ ” (Emphasis added.)
5. We do not consider ISLIC's contention, raised for the first time on appeal, that Brower did not even make a claim against Brown–Spaulding until after the policy term expired. In its memorandum of points and authorities filed with its motion for summary judgment in the trial court, ISLIC stated that “[t]he sole issue is whether the Brower ‘claim’ was reported to ISLIC within the policy period.” (Emphasis omitted.) It is a fundamental principle of review that an appellate court will not consider points raised for the first time on appeal. (See 9 Witkin, Cal.Procedure (3d ed. 1985) Appeal, § 311, pp. 321–322.) Moreover, the evidence submitted during the summary judgment proceedings reveals that if there was any question as to whether Brower made the claim against Brown–Spaulding during the policy period, it would be a material issue of fact.
MERRILL, Associate Justice.
WHITE, P.J., and BARRY–DEAL, J., concur.
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Docket No: No. A037042.
Decided: December 30, 1988
Court: Court of Appeal, First District, Division 3, California.
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