What Constitutes a Claim Under a Claims-Made Policy?

Most third-party liability policies are occurrence based.  In order for a loss to be covered under such a policy, the damage at issue must “occur” during the policy period.  In most instances, it does not matter when a claim is actually asserted as long as the damage took place during the policy period.  A claims-made policy, on the other hand, only provides coverage for claims first made against the insured and reported to the insurance company during the policy period or shortly after expiration thereof.  A professional liability policy, such as an attorney malpractice policy, is the most common type of claims-made policy.

One of the benefits of a claims-made policy is that it is not necessary to determine when the particular event that gave rise to the claim occurred because it is the making of the claim that triggers coverage and not the “occurrence” of the damage that gave rise to the claim.  Another benefit is that insurers can limit the time during which they will be subject to claims being made under a particular policy to a certain finite period.  An insurer’s liability under a claims-made policy generally ends at a fixed date.  Under an “occurrence” based policy, in contrast, insurers can be subject to claims many years — and even decades — after a policy has expired.

An issue that frequently arises under claims-made policies is what constitutes notice of a claim.  That issue recently was addressed by Judge Salas in Innes v. St. Paul Fire and Marine Insurance Company, 2015 WL 5334580 (D.N.J. Sept. 11, 2015).  Innes arose out of a legal malpractice claim asserted against the law firm of Lesnevich & Marzano-Lesnevich, LLC (“the Firm”).  The Firm represented the plaintiff’s ex-wife in a divorce action. The plaintiff alleged that the while representing his ex-wife, the Firm gave his daughter’s passport to his ex-wife in violation of an agreement between the parties that the passport would be held by the Firm.  The ex-wife then fled the country with the child, which resulted in the plaintiff having to incur significant legal fees seeking his daughter’s return.

The Firm was insured under three consecutive professional malpractice policies issued by St. Paul Fire and Marine Insurance Company.  The first policy was in effect from October 23, 2006 through October 23, 2007.  The policies were claims-made policies, which provided:

We will pay on behalf of an insured “damages” and “claims expenses” for which “claim” is first made during the “policy period” and reported to us within the “policy period,” any subsequent renewal of the policy or applicable Extended Report period. Such “damages must arise out of an error, omission, negligent act or “personal injury” in the rendering of or failure to render “professional legal services” for others by you or on your behalf . . . .

Id. at *3 (emphasis in original).  “Claim” was defined as a “demand received by an insured for money or services alleging an error, omission, negligent act or ‘personal injury’ in the rendering of or failure to render ‘professional legal services’ for others by you or on your behalf.”  Id.  The policies further provided that there was no coverage for any claim:

[a]rising out of any error, omission, negligent act or “personal injury” occurring prior to the inception date of this policy if any insured prior to the inception date knew or could have reasonably foreseen that such error, omission, negligent act or “personal injury” might be expected to be the basis of a “claim” or “suit.”

Id. (emphasis in original).

In Innes, counsel for the plaintiff sent a letter to the Firm on January 24, 2006, indicating the he represented the plaintiff “in an action against [the] Firm.”  Id. at *1.  He instructed the Firm to put its insurance carrier “on notice.”  Two days later, the Firm responded, indicating that it believed the claim was “frivolous” and stating that it would accept service of any process if an action was commenced against it.  In June 2006, plaintiff filed an ethics claim against the Firm and in October 2007 he sued the firm.  In November 2007, the Firm first notified its insurance agent that a claim had been asserted against it.  Shortly thereafter, the insurance agent put the insurer on notice of the claim.

The Firm initially informed its insurer that it was not seeking coverage for the claim.  The Firm further informed its insurer that it believed the claim was frivolous and that it intended to defend itself.  The jury disagreed with the Firm’s argument that the claim was frivolous, and awarded the plaintiff in excess of $1.4 million.

The question before the court was whether the January 24, 2006 letter, which was sent to the Firm prior to the time the first policy went into effect, qualified as a “claim” under the policy.  The plaintiff argued that the letter did not constitute a claim because it did not contain a demand for the payment of money or services.  Finding the language of the policy to be unambiguous, the court concluded that the letter qualified as a claim.  The court observed that “[s]everal courts in this district and elsewhere have determined that similar letters constitute ‘claims’ under identical or nearly identical policy language despite the fact that they do not contain a verbatim demand for money or services.”  Id. at *7.

The court further held that “[e]ven if the claim was first made during the Policies’ term, the Underlying Action still would not be covered by the Policies because the Firm . . . could have reasonably foreseen that certain errors and acts might become the basis of a claim or suit.”  Id. at *8.  As noted by the court, “[t]he Policies cover acts that occurred before the initiation of the Policies’ term unless the insured knew or reasonably should have known that the act could result in a claim or suit.”  Id.

Although not yet addressed by the New Jersey Supreme Court, the Third Circuit has concluded that New Jersey Courts should use a subjective-objective analysis for determining whether an insured “knew or reasonably should have known” that its actions could give rise to a claim.  Under that analysis, a subjective test is used to determine whether the insured had knowledge that it committed certain errors and/or omissions and an objective test is used to determine whether those errors and/or omissions might reasonably result in a claim or suit.

With respect to the first part of the analysis, the court noted:

Here, there is no dispute that the Firm received a letter from Plaintiff’s attorney on January 24, 2006 stating that the Firm and Marzano–Lesnevich “wrongfully” turned over Victoria Innes’s passport to her mother and caused Plaintiff to incur “tens of thousands of dollars in legal fees.”  The Firm received this letter months prior to the initiation of the Policies in October 2006.  The Firm and Marzano–Lesnevich were also “clearly aware of these incidents because they were involved in them.”  As Plaintiff concedes in his brief, “[t]hey gave over the passport to the child’s mother at her request.”

 Id. (citations omitted).  As for the second part of the analysis, the court observed:

There is ample evidence in the record to support [the] conclusion [that the insured’s alleged errors and/or omissions might reasonably result in a claim or suit.]  First, the January 24, 2006 letter specifically states that [the author] represents Plaintiff “in an action against your firm” and instructs the Firm to “put your carrier on notice.” The Firm indisputably recognized that a suit might be forthcoming, as it responded that “[i]f you want to file a lawsuit, I will accept service.”  Second, in June 2006, Plaintiff filed an attorney ethics grievance against [the Firm] “alleging the same misconduct described in the January 2006 letter.”

Id. (citations omitted).

The plaintiff also argued that the policies violated public policy because they did not provide any retroactive coverage (i.e., coverage for claims arising out of acts that took place prior to the policy period).  The New Jersey Supreme Court previously held that a claims-made policy that failed to provide retroactive coverage was unenforceable as written.  The Innes court rejected the plaintiff’s argument, noting that “‘claims made’ policies provide unlimited retroactive coverage for acts that occurred prior to the policy term, as long as the claim made to the insured occurred within the term.”  Id. at *6.  The issue here was that the claim was first reported prior to the term of the first policy.

The lesson to be learned from this case is that the Firm should have put its insurer on notice of a potential claim as soon as it received the January 24, 2006 letter, regardless of whether it believed the claim had any merit.  Knowledge of a potential claim is all that matters; it is not a defense that the insured did not believe that the claim had any merit.  Indeed, meritless claims often turn into litigation and in this particular instance the claim result in a verdict in excess of $1.4 million.

Although we do not know what happened in this particular case, insureds often are reluctant to notify their insurers of a potential claim because the existence of a claim may impact an insured’s ability to obtain coverage in the future and/or the amount it must pay in premiums to do so.  Thus, some insureds may believe they are better off trying to resolve a potential claim on their own.  By attempting to do so, however, an insured runs the risk that it will be left without coverage.

A second issue in this case, which was not addressed by the court, was that the Firm notified the wrong insurer.  It should have provided notice to the insurer that provided coverage during the period from October 2006 to October 2007, assuming it had a policy in place during that period.  Of course, it would have had to provide notice to that insurer during that particular policy period.  By the time an action was commenced against the Firm it simply was too late to put the prior insurer on notice.


© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.


By William D Wilson

I am a partner in Mound, Cotton, Wollan & Greengrass, which is headquartered in New York City. I am in charge of running the firm's New Jersey office, which is in Florham Park. I have been practicing law for approximately 23 years and focus primarily on insurance related matters


  1. Because of the stringent reporting requirements of claims-made policies, not knowing when or what to do when a claim arises can spell disaster for an insured.

    1. I agree. This is why it is critical for an insured to be familiar with the reporting requirements under its insurance policies before a loss occurs.

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