Knowledge of Prior wrongful act precludes coverage under claims made policy
Cohen-Esrey, the insured, was a property manager for an apartment complex. Its employee, Phillips was found to have been pocketing rental money in September, 2006. Cohen-Esrey notified its insurers of a potential claim on or before October 30, 2006. But on November 1, 2006, Cohen-Esrey switched its errors and omissions coverage to Twin Cities. No notice of the potential claim was given to Twin Cities until after June, 2007, when the apartment complex owners demanded that Cohen-Esrey make good on the money its employee, Phillips, stole. When Twin Cities denied the claim, Cohen-Esrey sued. On summary judgment, the trial court found for Twin Cities because of the failure to satisfy the policy’s condition precedent that at the policy’s inception Cohen-Esrey “was [not] aware of [a] Wrongful Act, fact, circumstance or situation that [it] knew or could reasonably have foreseen might result in a Claim under this Policy.” The Tenth Circuit affirmed.
Cohen-Esrey’s errors-and-omissions policy with Twin City was a claims made liability policy that covered both loss and defense costs. “Under a claims-made policy, coverage is only triggered when, during the policy period, an insured discovers and notifies the insurer of either claims against the insured or occurrences that might give rise to such claims.” In contrast, under an occurrence policy, “coverage becomes effective if the negligent or omitted acts occur during the term of the policy.” The Twin City policy covered losses that Cohen-Esrey “shall become legally obligated to pay . . . resulting from Claims first made against the Insured during the Policy Period . . . for a Wrongful Act by the Insured, or an Entity for whom an Insured Entity is legally responsible. The policy provision central to the dispute states that “as [a] condition[] precedent to coverage hereunder[,] . . . as of the inception date no partner, principal, officer, director, or member of the Insured was aware of any Wrongful Act, fact, circumstance or situation that he or she knew or could reasonably have foreseen might result in a Claim under this Policy.” Such prior-knowledge conditions are common in claims-made policies because they “ensure that only risks of unknown loss are potentially incurred,”
Kansas applies what it terms a two-prong, subjective-objective test to determine whether a prior-knowledge condition has been satisfied. The subjective prong is “whether the insured knew of certain facts.” The objective prong is whether Cohen-Esrey could reasonably have foreseen that the facts known to it might result in a Claim under the Policy. Because the facts show that the insured knew facts which might result in a claim under the policy and failed to tell Twin City about those facts, summary judgment was proper.
Tenth Circuit applying Kansas law
This is one of the problems with changing insurers when you have a claims made policy. Tail coverage with the prior insurer may have covered the claim. If the insured had advised the new insurer of the potential claim, there would likely have been a rider excepting the claim from coverage. But, at that point, the insured could have made an informed decision as to what to do; based on what the insurance company advised it would except from coverage.
