No Duty to Defend Under Claims-Made-and-Reported Policy Where Notice of Claim Given Nine Months After Cancellation

An Illinois appellate court has held that a trial court properly awarded judgment to an insurer because it had no duty to defend or indemnify its insured under its claims-made-and-reported policy where notice of the underlying negligence lawsuit came in more than nine months after the policy was cancelled.  Southwest Disabilities Services and Support v. ProAssurance Specialty Ins. Co., Inc., 2018 WL 3635473  (Ill. App. Ct. July 27, 2018).

The insured, an assisted living facility for developmentally disabled adults, was sued for negligence in February 2014 by the family of one of its residents who allegedly sustained injuries while under the facility’s care in November 2012. The assisted living facility sought coverage in March 2014 under its a claims-made-and-reported Social Services Entity Liability Policy for the policy period beginning September 26, 2012 and ending September 26, 2013.  The policy, which required notice during the policy period of a claim or suit which has been made or filed, or which an insured reasonably expects to be made or filed, had been cancelled in May 2013 for failure to pay the policy premium.  The insurer denied coverage on the basis that the lawsuit was reported to the insurer after the policy period had expired, and specifically in this case, after the policy was cancelled.  The assisted living facility then sued the insurer seeking a declaration that the insurer had breached its duty to defend the negligence suit.

On cross-motions for judgment on the pleadings, the trial court ruled in favor of the insurer, finding no duty to defend or indemnify.  The insured appealed and invoked the “estoppel doctrine,” arguing that the trial court should have denied the insurer’s motion for judgment because it failed to defend the lawsuit under a reservation of rights or file a declaratory judgment action.  The appellate court explained that the application of this doctrine, as set forth in Employers Insurance of Wasau v. Ehlco Liquidating Trust, 708 N.E.2d 1122 (Ill. 1999), is not appropriate if the insurer had no duty to defend or if the insurer’s duty to defend was not properly triggered.   Here, the court explained, the doctrine does not apply because coverage was only triggered if the occurrence was “first reported during the policy period,” and the insured reported the incident at issue in March 2014, nine months after the cancellation of the policy.  The court noted that the insurer did not rely upon a breach of notice condition, and instead relied on the assisted living facility’s failure to fulfill its reporting duties to trigger coverage, which it could have done by reporting the potential for a claim when the policy was cancelled or by purchasing an extended reporting endorsement.

The appellate court also rejected the insured’s argument that the policy was ambiguous because it referred to “occurrence,” and therefore it should reasonably be interpreted to be an occurrence policy instead of a claims-made policy.  In doing so, the court pointed to the definition of occurrence in the policy, as well as the bold, capitalized lettering stating that the coverages within the policy were written on a “modified claims-made” basis, and concluded that the policy is not susceptible to any other interpretation other than that the insured was required to report a claim within the policy period to trigger coverage.