Opinion
Case No. 5:20-cv-101
2021-01-25
ALPS PROPERTY AND CASUALTY INSURANCE COMPANY, Plaintiff, v. UNSWORTH LAPLANTE PLLC, and Seth Sherman, Individually and as Executor of the Estate of Constance Sherman, Defendants.
William L. Boesch, Esq., Sugarman, Rogers, Barshak & Cohen, P.C., Boston, MA, for Plaintiff. Craig Weatherly, Esq., Burlington, VT, David R. Bookchin, Esq., Benjamin, Bookchin & Durrell, P.C., Montpelier, VT, for Defendant.
William L. Boesch, Esq., Sugarman, Rogers, Barshak & Cohen, P.C., Boston, MA, for Plaintiff.
Craig Weatherly, Esq., Burlington, VT, David R. Bookchin, Esq., Benjamin, Bookchin & Durrell, P.C., Montpelier, VT, for Defendant.
ORDER ON MOTIONS TO DISMISS
Geoffrey W. Crawford, Chief Judge
This declaratory judgment action concerns coverage for a legal malpractice claim asserted by defendant Seth Sherman against the defendant law firm Unsworth LaPlante PLLC ("ULP"). ULP filed a motion to dismiss under Fed. R. Civ. P. 12(b)(6) on September 22, 2020; Mr. Sherman has adopted ULP's arguments and seeks dismissal on the same grounds. (Docs. 9, 10.) The court heard argument on the motions on November 12, 2020.
On November 30, 2020 the court requested input from the parties on its proposal to certify a question to the Vermont Supreme Court under V.R.A.P. 14(a). (Doc. 16.) In their December 15, 2020 responses, each party asserts or suggests that certification is unnecessary because its position should prevail under Vermont law. (See Docs. 17, 18.) The court has decided against certification because of the overwhelming weight of authority in favor of the plaintiff's legal position. Parties and Jurisdiction
ALPS Property & Casualty Insurance Co. ("ALPS") is an insurance company incorporated under the laws of Montana. ALPS provides professional-liability coverage to lawyers in Vermont. ULP is a law firm with its principal office in Essex Junction, Vermont. Mr. Sherman is a Vermont resident. The amount in controversy exceeds $75,000. This court exercises diversity jurisdiction over the case.
Facts
The court accepts the allegations in the complaint as true.
In December 2015, Mr. Sherman and his mother Constance Sherman hired ULP to transfer title to her real property in Garrison, New York to an inter vivos trust which Mr. Sherman controlled as trustee. Following his mother's death in July 2016, Mr. Sherman learned that ULP had never transferred title to the trust. Instead, his mother's estate continued to own the real property. He asserts that the law firm's error caused him to incur additional costs and other damages.
In October 2016, Mr. Sherman complained to ULP that the transfer had not occurred. After an exchange of phone calls and emails, a partner in the ULP firm wrote to Mr. Sherman in early November 2016:
I understand how frustrated you are with the situation at this point, and we would like to split your [New York] probate fees with you. Unsworth Law would pay half of the probate bill you received from the NY Attorney. I know there was a lot of miscommunication and we deserve some blame for that, so we would like to do this to attempt to rectify the issues you are dealing with.
(Doc. 1 ¶ 11.)
In July 2017, Mr. Sherman was appointed executor of his mother's estate in New York.
In October 2016—when Mr. Sherman first complained to ULP about the state of the title for his mother's New York property—ULP was insured by ALPS for professional liability claims under a one-year claims-made-and-reported policy, which commenced on March 11, 2016 and ended on March 11, 2017. ULP purchased similar policies for one-year periods for March 2017–March 2018 and March 2018–March 2019.
In September 2019, a lawyer representing Mr. Sherman in New York wrote to ULP seeking payment of legal fees and costs resulting from the alleged failure of ULP to complete the transfer of title during Ms. Sherman's lifetime. After receiving the letter, ULP notified ALPS about the claim. This was the first notice of claim provided by ULP to ALPS.
The ALPS policy issued to ULP in 2016 contains multiple provisions explaining the duty of the insured to provide notice of a claim and the consequences of delay. The Definitions section provides in relevant part: "This is a ‘claims made and reported’ insurance policy. Therefore, as a condition precedent to the company's obligation to defend or indemnify the insured under this policy, the insured must immediately report any claim to ALPS during the policy period." (Doc. 1 ¶ 16.)
The "Insuring Agreements" section contains similar language limiting coverage to an insured's liability "arising from or in connection with a claim first made against the insured and first reported to the company during the policy period." (Id. ¶ 17.) The policy contains language requiring the insured to report express claims (such as the September 2019 letter from Mr. Sherman's attorney) and potential claims defined as
when an Insured becomes aware of an act, error or omission ... that could
reasonably be expected to be the basis of a Claim, but no Claim arising therefrom has yet been made, then as a condition precedent to the Company's obligation to defend or indemnify the insured under this Policy, the Insured shall immediately give written notice to the Company ....
(Id. ¶ 19.) The policy was explicit about the adverse consequences of failing to provide notice of a claim within the policy period:
In the event an Insured fails to give written notice to the Company of a Claim, prior to the end of the Policy Period in which the Claim is made, or in the event an Insured fails to give written notice to the Company of a potential Claim ... prior to the end of the Policy Period in which the Insured first becomes aware of the act, error, [or] omission ..., then no coverage for any such Claim shall be afforded to the Insured under any future policy issued by the Company.
(Id. ¶ 20 (brackets and second ellipsis in original).)
The applications submitted by ULP for the 2017–18 and 2018–19 policy years contained requirements that ULP disclose any facts which could give rise to a claim. ULP made no such disclosures in obtaining coverage for these later policy years. The application disclosed the consequences of not disclosing potential claims:
The failure to report any claims made against the applicant or any attorney in the applicant's firm under any current or previous insurance policy, or failure to reveal timely facts or circumstances which may give rise to a claim against current or prior insureds, may result in the absence of coverage for any matter which should have been reported or may result in the failure of coverage altogether.
(Id. ¶ 28.)
ANALYSIS
In the complaint, ALPS alleges that ULP learned about Mr. Sherman's claim when he first complained to the firm in October 2016. ULP's failure to provide notice of the claim in the policy year when it was first made precludes coverage under either the 2016 policy or the subsequent policies. In denying coverage, ALPS relies on the policy provisions which define the scope of claims-made-and-reported coverage in 2016 and impose an obligation on applicants in subsequent years to report potential claims.
ULP and Mr. Sherman respond that under Vermont law, late report of a claim voids coverage only if the insurer can demonstrate that it suffered prejudice through the delay. Defendants argue that ALPS has not alleged prejudice as a result of ULP's "alleged breach of the notice provisions of the policies it issued ...." (Doc. 9 at 6.)
The court applies Vermont law in construing and enforcing the terms of insurance policies marketed to Vermont residents. See Md. Cas. Co. v. Continental Cas. Co. , 332 F.3d 145, 151 (2d Cir. 2003) ("A federal court sitting in diversity applies the choice-of-law rules of the forum state."); Acadia Ins. Co. v. WeLog, Inc. , No. 5:15-cv-102, 2017 WL 2964805, at *4 (D. Vt. July 11, 2017) (noting that Vermont courts have adopted the Restatement (Second) of Conflict of Laws to resolve choice-of-law questions in contract cases, and that § 193 of the Restatement provides that, for insurance contracts, "the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy" should apply). Since the decision of the Vermont Supreme Court in Cooperative Fire Insurance Association of Vermont v. White Caps, Inc. , 166 Vt. 355, 694 A.2d 34 (1997), the Vermont Supreme Court has followed the near-universal American practice of requiring proof of prejudice to the insurer before upholding a denial of coverage on the basis of late notice for traditional "occurrence" policies. The White Caps Court held that "an insurer which seeks to be relieved of its obligations under a liability insurance policy on the ground that the notice provision was breached must prove that the breach resulted in substantial prejudice to its position in the underlying action." Id. at 356, 694 A.2d at 35. The White Caps Court declined to rule on late notice in the context of "claims made" policies: "We are not presented here with the question whether the rule should be different when the case involves a ‘claims made’ policy, as some courts have held, and therefore express no opinion on this subject." Id. at 363 n.2, 694 A.2d at 39. This case presents that issue.
The holding in White Caps cannot be read without reference to footnote 2 of the White Caps decision. Although the sentence immediately preceding the footnote concerns the burden of proof as to "prejudice," the footnote appears at the end of the paragraph that announces the Court's holding. The plain language of footnote 2 makes it clear that the Court's holding did not resolve—one way or the other—whether an insurer must prove prejudice to be relieved of its obligations under a "claims made" policy on the basis of breach of a notice provision.
I. Occurrence v. Claims-Made Policies
Liability insurance is sold in two principal forms: occurrence and claims-made policies. See generally 7 Couch on Insurance § 102:22 (3d ed.). Occurrence policies provide coverage for claims arising from events which take place within the policy period. Claims-made policies cover only claims lodged with the insured (or potential claims which become known to the insured) within the policy period. Most claims-made policies, including the policies involved in this case, are claims-made-and-reported policies. Acosta v. Potts , No. 2:16-cv-612, 2017 WL 4418579, at *5 (S.D. Ohio Oct. 5, 2017). Such a policy "conditions coverage on the insured reporting the claim within a specified period." Restatement of the Law of Liability Insurance § 35 cmt. c.
Claims-made-and-reported policies reduce the insurer's obligation to create reserves for unknown, future claims because the end of the policy year provides a firm deadline for the submission of claims. Id. cmt. d ("A claim-reporting condition that sets an outside limit on the date by which all claims under a policy must be reported allows the insurer to have a date certain on which it can reduce its [incurred but not reported] reserves on that policy to zero.").
II. Authorities Requiring Strict Enforcement of the Reporting Requirement for Claims-Made-And-Reported Policies
Courts have frequently enforced the reporting requirement for claims-made-and-reported policies without imposing a further requirement of prejudice. They do so because the claims report serves different functions in the two policies. In the occurrence policy, the requirement of prompt report allows the insurer to investigate the claim before the trail grows cold. See White Caps , 166 Vt. at 361, 694 A.2d at 38 ("Prompt notice enables an insurance company to make a ‘seasonable investigation of the facts relating to liability.’ " (quoting Bayer & Mingolla Constr. Co. v. Deschenes , 348 Mass. 594, 205 N.E.2d 208, 212 (1965) )). Timely notice also protects the insurer from default judgments entered against an insured. Restatement of the Law of Liability Insurance § 35 cmt. b, illus. 1.
In a claims-made-and-reported policy, the requirement of prompt report also establishes the scope of coverage. Only those claims presented to the insured or known to be reasonably likely are covered. Events not recognized as giving rise to liability are covered in future claims-made or tail policies. See McAlister v. Vt. Prop. & Cas. Ins. Guar. Ass'n , 2006 VT 85, ¶ 13, 180 Vt. 203, 908 A.2d 455 (claims-made policy covered claims "only if damages were caused by a medical incident that occurred during the claims-made policy period and if the claim was reported to the company while the claims-made policy was in effect"). Because of the role of reports of claims in defining coverage, courts in the majority of states do not impose a prejudice requirement on the condition of timely report by the insured.
The Restatement of Liability Insurance § 35 recognizes the distinction. Subsection (1) states the general requirement that an insurer demonstrate prejudice when denying coverage for late notice. Subsection (2), however, provides a different rule for claims-made-and-reported policies: "With respect to claims first reported after the conclusion of the claim-reporting period in a claims-made-and-reported policy, the failure of the insured to satisfy the claim-reporting condition in the policy excuses an insurer from performance under the policy without regard to prejudice ...." The comments to § 35 describe the underwriting considerations which justify the different treatment of late report in the two types of policies and the continuing strict enforcement of the notice requirement in claims-made-and-reported policies.
Section 35(2) contains an exception for policies which do not contain an extended reporting period. The extended reporting period protects insureds who learn of a claim in the closing days or hours of their policy and receive additional time after the close of the policy period to provide notice. This issue is not addressed by the parties here and is unlikely to be relevant since ALPS alleges that ULP received notice of the potential claim no later than the date its attorney offered to pay half the expenses of probate to "rectify the issues" raised by the client. ULP sent this letter in November 2016, more than four months before the end of the 2016–17 policy period.
The same cannot be said for a "claims-made" policy that does not include the report requirement. See Restatement of the Law of Liability Insurance § 35 cmt. c ("A claims-made policy that contains only the traditional notice condition, and not the claim-reporting condition in the insuring agreement, is not a claims-made-and-reported policy, and, thus, only the ordinary notice-prejudice rule would apply to such a policy.").
The leading insurance treatises recognize the function the claims-report requirement plays in defining the scope of coverage. In Couch on Insurance , the authors recognize two different notice requirements in claims-made policies. The first is the requirement of "prompt" notification which allows for a timely investigation of the claim by the carrier. 13 Couch on Insurance § 186:13 (3d ed.). The second is a requirement that the claim be reported to the insurer within the policy period. "Notice under [this] second provision is not simply part of the insured's duty to cooperate but defines the limits of the insurer's obligation, and if there is no timely notice, there is no coverage." Id. Similarly, an article within New Appleman on Insurance, Current Critical Issues in Insurance Law II (Summer 2009) distinguishes between the application of the notice-prejudice rule in occurrence and claims-made policies. "[I]t is important to note that courts generally apply a no-prejudice approach with respect to claims-made policies. Courts strictly construe notice requirements in claims-made policies because coverage is defined by the timing of the notice." Id.
The different treatment of the notice requirement in occurrence and claims-made-and-reported policies is the rule in the majority of American jurisdictions. These decisions uphold coverage denials in claims-made-and-reported policies when the insured reports the claim after the deadline set in the policy. The majority of jurisdictions as well as the Restatement of Liability Insurance and the leading insurances treatises decline to impose an additional prejudice requirement on the insurer.
See, e.g. , Banjosa Hospitality, LLC v. Hiscox, Inc. , 788 F. App'x 531, 532 (9th Cir. 2019) (under Montana law, insurer need not prove prejudice to deny coverage if the insured failed to report the claim during the term of claims-made-and-reported policy); McCarty v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. , 699 F. App'x 464 (6th Cir. 2017) (same, Ohio law); Philadelphia Consol. Holding Corp. v. LSI-Lowery Sys., Inc. , 775 F.3d 1072, 1078 (8th Cir. 2015) (same, Missouri law); DiLuglio v. New England Ins. Co. , 959 F.2d 355 (1st Cir. 1992) (Rhode Island law); Hanover Ins. Co. v. R. W. Dunteman Co. , 446 F. Supp. 3d 336, 348 (N.D. Ill. 2020) (Illinois law); Citizens Ins. Co. of Am. v. Assessment Sys. Corp. , No. 18-CV-01762 (SRN/ECW), 2019 WL 4014955, at *10 (D. Minn. Aug. 26, 2019) (Minnesota law); Centurion Med. Liability Protective Risk Retention Grp. Inc. v. Gonzalez , 296 F. Supp. 3d 1212 (C.D. Cal. 2017) (California law); Clauson & Atwood v. Professionals Direct Ins. Co. , No. 12-cv-199-JL, 2013 WL 1966058, at *6 (D.N.H. May 13, 2013) (New Hampshire law); Jennings Constr. Servs. Corp. v. Ace Am. Ins. Co. , 783 F. Supp. 2d 1209, 1212–13 (M.D. Fla. 2011) (Florida law); Gargano v. Liberty Int'l Underwriters, Inc. , 575 F. Supp. 2d 300, 310 (D. Mass. 2008) (Massachusetts law); Trek Bicycle Corp. v. Mitsui Sumitomo Ins. Co. , No. 5:05CV-44-R, 2006 WL 1642298, at *2–3 (W.D. Ky. June 7, 2006) (Kentucky law).
III. The Hardwick Decision
After the White Caps decision, the Vermont Supreme Court decided Hardwick Recycling & Salvage, Inc. v. Acadia Insurance Co. , 2004 VT 124, 177 Vt. 421, 869 A.2d 82. In that case, the Vermont Supreme Court applied the White Caps notice-prejudice rule to a "claims made" policy. Id. ¶¶ 39–42 ; see also Columbia Cas. Co. v. TransFin Ins. Ltd. , No. 2:05-CV-199, 2007 WL 9710915, at *13 (D. Vt. Apr. 27, 2007) (extending notice-prejudice rule to reinsurance policy).
Both the Hardwick and the Columbia Cas. Co. decisions concern "claims-made" but not "claim-made-and-reported policies." The pollution coverage in Hardwick was conditioned on an occurrence within the policy period (and "coverage territory") and a "claim for damages [that is] first made against any insured ... during the policy period." Hardwick , 2004 VT 124, ¶ 4, 177 Vt. 421, 869 A.2d 82. The date on which a claim is made was defined as the time "[w]hen notice of such claim is received and recorded by any insured or by us, whichever comes first ...." Id. The policy required receipt of the claim within the policy period but not a report to the insurer.
The reinsurance certificate at issue in Columbia Casualty defined the scope of coverage as "losses or damages which the [primary insurer] is legally obligated to pay with respect to which Insurance is afforded during the term of this Certificate under the policy reinsured...." Columbia Casualty , 2007 WL 9710915, at *4. In other words, the reinsurance obligation was commensurate with the primary insurer's obligation to its customer. While an insurer covered by a reinsurance certificate is obligated to provide timely notice of events which may result in a claim against the reinsurer, the scope of the reinsurance coverage is established by the primary policy. The effect of late notice is governed by a prejudice standard. See Unigard Sec. Ins. Co., Inc. v. N. River Ins. Co. , 4 F.3d 1049 (2d Cir. 1993) (applying New York insurance law).
Neither Hardwick nor Columbia Casualty concerned policies in which a report of claim to the insurer within the policy year was a condition of coverage. Both policies contained requirements that the insured cooperate by providing prompt notice of the claim—a universal requirement of all insurance policies—but that requirement is sufficiently enforced by a prejudice requirement. Neither decision is contrary to the majority rule that in the context of claims-made-and-reported policies, the insurer need not prove prejudice in order to deny coverage. Instead, these cases illustrate the different application of the notice-prejudice rule in claims-made and occurrence policies on the one hand and claims-made-and-reported policies on the other.
Conclusion
The court concludes that as a matter of Vermont law, ALPS is not required to prove that it was prejudiced by the late report of the claim. Although the Vermont Supreme Court has not ruled on the application of the report-prejudice rule in the context of claims-made-and-reported policies, the denial of a prejudice requirement for these policies by a majority of courts in other jurisdictions and the recent adoption of the same position in the Restatement of the Law of Liability Insurance § 35 makes it extremely likely that the Vermont Supreme Court will adopt the same rule when presented with the opportunity.
Defendants’ motions to dismiss (Docs. 9, 10) are DENIED.