McCarter and English LLP on Notice and Reporting Requirements in Claims-Made and Claims-Made-and-Reported Policies: A Potential Trap for Both Courts and Policyholders
Directors and Officers, Errors and Omissions, and similar liability insurance policies are often (almost always, in fact) written on a “claims-made” basis. This means that, in general, the policy will provide coverage if the claim against the insured is made during the policy period. In that sense, these policies differ from other, "occurrence" based, liability policies, which generally define coverage in terms of when some act, event or omission gives rise to damage or injury during the policy period.
Many courts, however, fail to grasp an important distinction among “claims-made” policies, which has a vital bearing on coverage issues, most notably that of late notice. Among “claims-made” policies in general are “pure” claims-made policies, which simply require that a claim against the insured be made during the policy period, and more restrictive (and thus less expensive) claims-made-and-reported policies. These latter types of policies require both that the claim against the insured and the reporting of that claim to the insurer be made during the policy period.
This less costly type of claims-made coverage comes with a price. Many courts hold that a claims-made-and-reported policy is not subject to the requirement that an insurer show prejudice to prevail on a late notice defense, because the reporting requirement defines the extent of coverage, and limits that coverage to claims reported to the insurer during the policy period. This is, at least arguably, a defensible position. Thus, in exchange for a lower premium, an insured loses the benefit of the notice-prejudice rule, which has been almost universally adopted by courts (or legislatures).
On the other hand, in the case of pure claims-made policies, which contain no such reporting (and hence no such coverage limiting) requirement, insurers who assert a late notice defense to a coverage claim are rightly always subject to the notice-prejudice rule. A contrary holding has no support in the policy language, and is often the result of a failure to grasp the vital distinction between a pure claims-made and a claims-made-and-reported policy.