Insurer with Knowledge of Potential Claim Cannot Agree with Insured to Cancel Policy

Applying Oklahoma law, the Oklahoma Supreme Court has held that an insurer and an insured cannot agree to cancel a claims-made policy where the insurer has knowledge of a potential claim against the insured.  Chandler v. Valentine, 2014 WL 2854703 (Okla. June 24, 2014). 

In November 2004, an insured doctor operated on a patient while under the influence of prescription medication, and the patient died.  The Oklahoma medical review board revoked the doctor’s license in March 2005.  Thereafter, the doctor contacted his professional liability insurer and asked that his policy be cancelled and his premium refunded.  The doctor’s broker also provided the insurer with a newspaper article detailing the negligent operation, the patient’s death and the revocation of the doctor’s license.  The insurer agreed to cancel the policy effective March 10, 2005.

Subsequently, in June 2005, the estate of the deceased patient filed suit against the doctor.  After the doctor’s debts were discharged in bankruptcy, the doctor and the estate entered into a consent judgment.  The estate then sought coverage for the judgment from the insurer, but the insurer denied coverage on the grounds that the claim was made after the policy had been cancelled.

The Oklahoma Supreme Court found that the cancellation of the policy violates an Oklahoma statute that prohibits cancellation of a liability insurance policy “by any agreement between the insurer and the insured after the occurrence of any such injury, death or damage for which the insured may be liable.”  The insurer argued that the statute applies only to occurrence policies, not to claims-made policies like the doctor’s policy.  The court disagreed, finding that the statute’s purpose was to protect injured third parties regardless of policy type, and thus it applies to claims-made policies where there is an agreement between an insurer and an insured that cuts off coverage for a potential claim of which the insurer has actual knowledge.  Here, the court found, the insurer agreed with the doctor to cancel the policy with “actual knowledge of the events that would certainly generate a wrongful death action against the insured.”  Accordingly, the court held that the policy cancellation was ineffective, and the estate is entitled to coverage under the policy for the consent judgment.