Pennsylvania Supreme Court Declines to Extend Prejudice Requirement to a Claims-Made Policy’s Notice Provision
On April 29, 2009, the Pennsylvania Supreme Court affirmed a lower court’s decision enforcing the notice requirements in a claims-made policy without requiring the insurer to show it was prejudiced by the late notice. See ACE Am. Ins. Co. v. Underwriters at Lloyds & Cos., No. 45 EAP 2008 (Pa. Apr. 29, 2009). Troutman Sanders LLP partners Chuck Hadden and Stephanie Schmelz and associates Meredith Baron and Sara Doran filed a brief supporting affirmance on behalf of amicus curiae Property Casualty Insurers Association of America (“PCI”).
In this matter, errors and omissions insurers had denied coverage for settlement of the underlying claim on the grounds that notice by the insured was at least one year late. The insured filed suit and, after a jury trial, a verdict was returned in the insurers’ favor. On appeal, the Superior Court affirmed the trial court’s judgment. See ACE Am. Ins. Co. v. Underwriters at Lloyds & Cos., 939 A.2d 935 (Pa. Super. 2007). Specifically, the Superior Court found that “notice is a condition precedent to coverage, and not a limitation of coverage.” Id. at 940. The insured had the burden to show compliance with the policy’s notice provisions – which it failed to do. Nor were the insurers required to show prejudice from the breach of the notice provision before they could deny coverage based on late notice. The so-called Brakeman notice-prejudice rule applied only to occurrence policies, not claims-made policies such as the one at issue. Id. at 940-41 (citing Brakeman v. Potomac Ins. Co., 371 A.2d 193 (Pa. 1977)).
In its appeal to the Pennsylvania Supreme Court, the insured challenged the lower court’s rulings on the burden of proof, as well as the determination that the insurers need not show prejudice. The insured also argued that the court should make a legal distinction between notice and reporting provisions on the grounds that they served different purposes. The insurers and amici countered that the lower courts properly had determined that the insured had the burden of proving its compliance with the policy’s notice requirements. They maintained that the notice provision should be enforced as written. In addition, they cited numerous decisions refusing to extend a notice-prejudice requirement to claims-made policies, noting that the nature of claims-made policies justified enforcement of notice requirements. PCI also provided the Court with empirical evidence demonstrating that claims-made policies’ pricing reflected the strict notice requirement and made important public policy arguments in support of its position. The Pennsylvania Supreme Court also received supplemental briefing on – and thus had an opportunity to review and reject – the Texas Supreme Court’s reasoning when it recently imposed a prejudice requirement on claims-made policies in certain circumstances. See Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., No. 06-0598, 2009 WL 795530 (Tex. Mar. 27, 2009).
After a review of the briefing, as well as oral argument, the Pennsylvania Supreme Court issued a per curiam opinion affirming the Order of the Superior Court.