The Calm Before the Storm: As the world deals with the Covid-19 pandemic, the most pressing insurance questions concern first-party Business Interruption coverage for staggering amounts of lost income. But before long, equally massive third-party insurance claims are expected with respect to lawsuits coming out of the Covid-19 situation. Businesses will face lawsuits from all directions — shareholders alleging that companies did not adequately manage the Covid-19 challenges; customers alleging that errors or omissions by businesses caused them damages; data breaches while businesses let down their guard due to Covid-19; employees alleging that they became sick because employers required them to work; or, schools and businesses accused of re-opening without adequate protections. The potential liability scenarios are practically endless.
These lawsuits will give rise to a second wave of insurance disputes, and it is likely that insurers will take a hard line with respect to Covid-19-related liability claims, based upon the same economic realities shaping their denials of Business Interruption claims. The number and size of claims will be staggering, and insurers will circle the wagons to cut their losses. Many aspects of insurance disputes are beyond the policyholder’s control. However, the decision to submit a Notice of Circumstances within the current policy year, before a Claim materializes, is one item completely within the control of the policyholder and should be considered carefully.
What Does a Notice of Circumstances Accomplish? The right to submit a Notice of Circumstances is an important feature of Claims Made insurance policies, which includes Directors & Officers (D&O), Errors & Omission (E&O), Employment Practices Liability (EPL), Cyber Liability, and other lines of insurance. Claims Made policies are triggered by a “Claim” against the policyholder, which typically is defined to include a lawsuit, a demand letter, and often a tolling agreement, during the policy period. Generally, a Claims Made policy is closed if there are no Claims by the date when the policy period ends. However, the policyholder may choose to submit a Notice of Circumstances during the policy period, describing circumstances that might give rise to a Claim in the future. If a Notice of Circumstance is submitted and a Claim is asserted after the policy period, but arising out of the noticed circumstances, then the Claim will be treated as if it were made when the Notice of Circumstances was submitted. By submitting a Notice of Circumstances, the policyholder is choosing to have an anticipated Claim considered under its present coverage, instead of its future coverage, which may be narrowed by new exclusions.
Why Now? Policyholders should be giving extra consideration to Notices of Circumstances with respect to potential Covid-19 lawsuits, because policies renewed in the coming year might include newly-crafted exclusions for Covid-19, viruses, pandemics, and so forth.1 The extent to which such exclusions will be added in the future to liability policies is not yet known. But using history as a guide, exclusions probably are coming. Whenever widespread, unexpected losses rock the insurance industry, insurers’ standard response is to declare that their policies were “never intended” to cover such losses, and to add a new exclusion to “clarify” that intent.2 Examples of such losses include pollution, asbestos, lead, and Y2K. It is hard to imagine that the Covid-19 crisis will not prompt the addition of exclusions in accordance with this pattern. The authors have consulted with several brokers, and there are anecdotal expectations that exclusions indeed are coming.
If future policies do add exclusions for Covid-19 losses, then current policies without such exclusions will become extremely valuable. In the world of asbestos and pollution insurance, occurrence-based policies sold before 1985, when exclusions were added, are an extremely valuable asset because they remain open indefinitely to pay for those costly liabilities. But Claims Made policies generally do not remain open beyond the policy period unless the policyholder has exercised the Notice of Circumstance option. In effect, a Notice of Circumstances converts a Claims Made policy into an occurrence-based policy with respect to the subject matter of the notice, providing coverage for Claims made years into the future. Therefore, if new exclusions for Covid-19 are added, then failing to submit a Notice of Circumstances before the current policy year ends could be an extremely costly missed opportunity.
What Are the Drawbacks to Submitting a Notice of Circumstances? The biggest challenge with respect to Notices of Circumstances is that policies typically require a notice to include something more than a general expectation that a Claim might be filed. A typical D&O policy requires that a Notice of Circumstances “must be specific and contain full particulars as to the facts and circumstances potentially giving rise to the Claim, including a narrative setting forth dates, names of the potential plaintiffs and affected Directors or Officers, names of other parties involved, the nature and scope of anticipated Claim, and all reasons why such a Claim is reasonably anticipated.”3 Courts typically will grant policyholders reasonable latitude, recognizing that details of a Claim are not known until it is filed. For example, a federal court in Colorado held a notice to be sufficient when it identified the positions of the potential defendants, the nature of alleged conflicts of interest, and referenced a bankruptcy court hearing that provided further detail.4 However, a notice that describes merely difficult financial times or a contemplated bankruptcy as the “circumstances” potentially giving rise to a Claim, without further detail, might not be a valid notice of circumstances.5 Thus, a notice stating that the Covid-19 pandemic, standing alone, might lead to a Claim is likely to be rejected by the insurer as too general, and there is risk that such a rejection would be upheld by a court.
The decision to submit a Notice of Circumstances should not be made lightly, because doing so may cause the insurer to invoke exclusion(s) in future policies. Most Claims Made policies contain a “prior notice” exclusion for Claims arising from the same facts or circumstances that were the subject of a notice under a prior year’s policy.6 Many prior notice exclusions carve out prior notices that were rejected, but not all contain such a carve-out, so theoretically an insurer could reject the notice under a current policy and then invoke this exclusion under a future policy. In addition to prior notice exclusions, a Notice of Circumstances might prompt the insurer to add a specific exclusion in the following years’ policies applying to the circumstances disclosed in the notice. In this scenario too, an insurer could reject a notice of circumstances, but add an exclusion for the subject matter of the notice, leaving the policyholder with a dispute in both policy years.
A final challenge to consider is that a Notice of Circumstance needs to be sufficiently broad to anticipate the landscape of Claims that are reasonably expected. An overly precise notification could be too limiting and lead to coverage disputes over whether the later-filed Claim falls within its scope.
Practice Pointers. Consider the following points with respect to Notices of Circumstances.
- Companies should talk to brokers and research the likelihood of a Covid-19 exclusion being added at their next renewal. If no exclusion is added, and if there is no reason why the current coverage is more desirable than the future coverage, then a Notice of Circumstances probably is not prudent. Any Claim(s) that do arise can simply be tendered when they are made.
- When a Notice of Circumstances is submitted, it must be drafted strategically. The Notice of Circumstances should provide the information required by the policy, and it needs to thread a delicate needle – it must be sufficiently specific that it will be accepted by the insurer, yet the broader it is written, the more likely a future Claim is to fall within its scope. Preparing the notice should be a team effort among the client, coverage lawyer, broker, and defense lawyer, if one has been retained.
- The possibility that an insurer could use a rejected Notice of Circumstances as a basis to deny coverage in a later year illustrates the importance of renewing Claims Made coverage with the same insurer for as many consecutive years as possible. If there is a dispute over the validity of a Notice of Circumstances, but the same insurer is on the risk during both the year of Notice and the year of Claim, it would be difficult for the insurer to deny the Claim in both years without appearing unreasonable. But if different insurers are involved, the policyholder risks a scenario where each insurer denies coverage and points at the other.
- It is important to stress confidentiality to all parties involved when a Notice of Circumstances is submitted. If the notice fell into the hands of an aggressive plaintiffs’ lawyer, it could be wrongly portrayed as an admission of wrongful conduct by the policyholder.
- If it is unclear whether to submit a Notice of Circumstances, the best strategy is to wait until late in the policy period to decide. A notice submitted at the end of the term is as effective as one submitted earlier, and with the passage of time, there likely will be more certainty regarding the variables effecting the decision – i.e., whether a Covid-19 exclusion will be added at renewal, whether a Claim is likely to be made in the coming year, and whether the details of the potential Claim are sufficiently developed to support a valid Notice of Circumstances.
Conclusion. Given the uncertainties caused by Covid-19, every renewal discussion relating to a Claims Made policy in the coming year should include analysis of whether a Notice of Circumstances would be in the policyholder’s best interest.
Richard D. Milone is the Managing Partner and Jennifer Romeo is a contract attorney for Milone Law Firm PLLC.
1Many first party property and business interruption policies (in contrast to liability policies) already include such exclusions, and their addition to all such policies in the next renewal cycle is probably a foregone conclusion.
2As a matter of contact law, however, parties’ rights are defined by the written instrument, and the undisclosed intent of one party cannot change the contract. The fact that insurers perceive the need to add exclusions creates a powerful argument that prior year’s policies – without a Covid-19 exclusion – do provide coverage.
3Genesis Ins. Company vs. Crowley, 495 F.Supp.2d 110, 114 (D. Colo. 2007).
4Genesis, 495 F.Supp.2d at 1115 (“[Colorado’s general disfavor of forfeiture] makes sense in connection with notification of a potential claim, where the exact identify of the parties and nature of the claims will be identified by a yet unknown plaintiff.”)
5Asche v. Hartford Ins. Co. of Illinois, 2006 WL 2792881, *6-7 (D. Conn. Sept. 28, 2006) (upholding rejection of Notice of Circumstances that does not identify specific Wrongful Acts, identity of parties, and other specifics required by policy language)
6A typical exclusion reads: “The insurer shall not be liable for Loss … based upon, arising out of, or attributable to any fact, circumstance, or situation which has been the subject of any written notice given under any policy of which this coverage section is a direct or indirect renewal or replacement, but this exclusion shall not apply if the insurer of such other policy rejects such notice as invalid.”
