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Pacific Employers Insurance v. Superior Court
Citations: 221 Cal. App. 3d 1348; 270 Cal. Rptr. 779; 1990 Cal. App. LEXIS 711Docket: B046562
Court: California Court of Appeal; July 2, 1990; California; State Appellate Court
Pacific Employers Insurance Company (PEIC) issued a "claims made" Professional Life Underwriters Insurance liability policy to Richard M. Rausch, which provided $5 million in liability coverage for claims made and reported between March 15, 1981, and March 15, 1983. After Richard's death on November 5, 1982, his widow, Elizabeth Ann Rausch, engaged attorney Kenneth A. Krekorian for probate matters. Elizabeth tendered the PEIC policy to Krekorian before the end of the coverage period. In early 1983, she received notices of creditors' claims against her husband's estate, which led to lawsuits filed in August 1983. However, Krekorian failed to notify PEIC of these claims during the policy period. After the policy expired, Elizabeth asked attorney Michael Morgan to notify PEIC of the claims, which he did on February 15, 1984. PEIC denied coverage, arguing the claims were not reported within the policy period. Elizabeth subsequently filed a lawsuit against PEIC on October 22, 1985, later amending the complaint to include Krekorian for malpractice due to his negligence in not reporting the claims in time. PEIC moved for summary judgment, claiming no obligation to defend or indemnify the estate due to the late notice. The trial court denied this motion, stating that PEIC needed to demonstrate actual prejudice from the delayed notice. PEIC then sought a writ of mandate, which the court denied, but the California Supreme Court later ordered the issuance of an alternative writ. Elizabeth Rausch contended that the policy language regarding claim reporting was ambiguous, that PEIC had not shown any prejudice as required by the notice prejudice rule, and that the reporting requirement was contrary to public policy. The determination of policy language ambiguity is a legal question requiring courts to evaluate the language according to its plain and ordinary meaning. Ambiguities in insurance policies are interpreted in favor of the insured only when a reasonable expectation of coverage exists, and some actual or apparent ambiguity must be present before this principle applies. The language in Section I of the policy clearly limits coverage to claims made and reported during the policy period. Rausch argues that Section III contradicts this requirement, claiming that written notice is only necessary if the insured is aware of a potential claim, not when an actual claim is made. However, a reasonable interpretation of Section III confirms that "claim" includes both potential and actual demands. Thus, the clear limitation in Section I remains intact. Rausch further contends that Section V allows her to report claims beyond the policy period as long as it is done within a "reasonable" time. Section V mandates that written notice be given "as soon as practicable" upon awareness of any act or injury that could lead to a claim. Although Rausch acted quickly to provide notice after discovering that it had not been given, the requirement for prompt notice implies that it would have been feasible for her to notify PEIC simultaneously when she provided the claims to her attorney. Thus, the interpretation of "practicable" suggests that timely notice was both possible and necessary. Notice must be given within a reasonable time and always within the policy period. Rausch's choice to have Krekorian forward claims to PEIC did not relieve her of the obligation to ensure compliance with policy notice requirements. The issue of whether the lack of timely notice negates PEIC's liability is addressed, distinguishing between "occurrence" policies, which cover acts during the policy period regardless of when claims are made, and "claims made" policies, which require claims to be reported during the policy period to trigger coverage. California's "notice-prejudice" rule prevents insurers from denying coverage due to untimely notice unless they can demonstrate actual prejudice resulting from the delay. This rule has traditionally applied to "occurrence" policies but has also been extended to "claims made" policies, as seen in the case of Northwestern Title Security Co. v. Flack. The distinction between the two types of policies is emphasized, as "occurrence" policies are designed for easily identifiable events, allowing insurers to quickly assess damages and establish reserves, while "claims made" policies rely on timely notification to the insurer for coverage to apply. Automobile liability policies like those in Campbell, Abrams, and Billington are classified as occurrence policies, where coverage is activated upon the occurrence of an event, regardless of when a claim is made. Notice provisions in these policies are intended to assist insurers in handling claims, not to define coverage. The requirement for notice is secondary to the occurrence that triggers coverage and should be interpreted flexibly. Initially, all professional liability policies were occurrence policies, but underwriters shifted to "claims made" policies due to the impracticalities of covering claims that could arise years after the negligent act or omission. Claims made policies rely on the notification of a claim to the insurer during the policy period to invoke coverage, contrasting with occurrence policies. The "notice prejudice rule," as applied in Campbell, could convert a claims made policy into an occurrence policy, leading to coverage for all negligence within the policy period, absent actual prejudice from late reporting. Claims made policies necessitate notice be provided "within a reasonable time" during the policy period, and failure to do so essentially extends coverage without compensation to the insurer, which is not permissible. The Dolan case is particularly relevant, as it underscores that the insured must notify the insurer of claims within the policy period. In this case, the insured was aware of the claims and provided them to her attorney within the policy period, but the attorney failed to notify the insurer. The policy explicitly covered only claims made and reported within the policy period, and while this creates more restrictive coverage, insurers have the right to limit coverage as stated in the policy. The document concludes with a consideration of whether the notice provision in PEIC's claims made policy violates public policy. An insurer may limit policy coverage, but such limitations must align with legal standards and public policy. Provisions in an insurance contract that violate public policy are unenforceable. "Claims made" policies provide benefits to insurers by allowing them to underwrite risks and set premiums with greater certainty, while also making insurance more accessible and affordable for insured parties. Rausch does not dispute the validity of "claims made" policies but challenges the notice requirement, arguing it undermines the insured's reasonable expectations and violates public policy. However, the policy's clear terms, including a provision for a one-year extended reporting period upon non-renewal, indicate that unreported claims are not covered. Rausch's argument that such policies restrict an insured's freedom to contract is dismissed, as insured parties can secure coverage through alternatives, such as new policies with extensions or retroactive coverage. The policy's terms are explicit in requiring claims to be made and reported within the policy period, and Rausch has not shown that these provisions contravene public policy or are unjust. The court directed that PEIC's motion for summary judgment be granted, discharging the alternative writ. Section III titled "POLICY TERRITORY AND CLAIMS-MADE PROVISIONS" stipulates that the insurance policy covers acts, omissions, or personal injuries occurring globally, under specific conditions. Claims must be made against the Insured within the United States, its territories, or Canada during the policy or extended reporting period. Additionally, the events leading to the claim must occur before the policy period ends. If the Insured becomes aware of any potential claim during the policy period, they must notify the Company in writing. A claim is deemed reported when the Company or its agent first receives written notice of the claim or an event that could lead to a claim. Rausch argues that the ambiguity in PEIC's policy differentiates it from the Zuckerman case, asserting that it is not a standard "claims made" policy; however, the document asserts that no ambiguity exists. Additionally, it is noted that the named insured paid an annual premium of $220.