|David A. Strauss||
Joseph A. Devall
Louisiana is a direct action state, and third party plaintiffs have successfully used this statute to argue that certain coverage disputes between tortfeasors and their insureds cannot deny an innocent tort victim access to the indemnity that would otherwise be provided by the insurer. In Gorman v. City of Opelousas, 148 So.3d 888 (La. 2014), the Louisiana Supreme Court put an end that argument and tackled an issue it previously left unanswered, that is, whether the Direct Action Statute precluded a coverage denial based on late notice when it would deny a third party plaintiff access to the indemnity dollars of the insurer. The Gorman Court answered “No,” and also offered a broad clarification beyond the specific issue presented: The Direct Action Statute does not confer greater rights on a third party plaintiff than those provided by an insurer to its insured under the insurance policy. In Gorman, the Louisiana Supreme Court bridged an authority gap that existed in cases involving an insured’s failure to timely give notice to its insurer under claims-made-and-reported policies. This is the correct conclusion because a different finding would have undermined the rights and liabilities an insured and insurer bargained for under an insurance contract.
Unlike an occurrence policy, where coverage attaches at the moment of the occurrence or injury, regardless of when a claim is made to an insurer, a claims-made policy shifts the risk of claims incurred, but not made, to the insured. Some claims-made policies go further and shift both the risk of claims incurred but not made and claims made but not reported to the insured. With these policies, best characterized as claims-made-and-reported policies, insurance coverage only attaches if the occurrence or injury is discovered and reported to the insurer within the term of the policy (Many E&O policies are written this way). Through a series of cases, leading up to Gorman, the Louisiana Supreme Court established that insurers may condition coverage on a claim being timely made and reported.
In Anderson v. Ichinose, 760 So.2d 302 (La. 1999), the Louisiana Supreme Court recognized that the trend nationwide has been generally to uphold claims-made policies. In Anderson, the Louisiana Supreme Court expanded the validity of claims-made policies by holding that the direct action statute did not “extend the protection of liability policies to risks that were not covered by the policy of which excluded thereby….” Id. at 307. The Louisiana Supreme Court, however, left unanswered the question of whether the reporting conditions in a claims-made-and-reported policy were enforceable against a third party suing an insurer under the Direct Action Statute, when the insured failed to meet the reporting conditions that were a condition precedent to coverage. The Louisiana Supreme Court declined to address that issue “because the injured third party’s claim had been neither timely made nor reported during the policy period as required by the policy.” Id. at 306 n. 7.
In Gorman, a four (4) to three (3) decision,the Louisiana Supreme Court found the reporting (notice) provisions in a claim-made-and-reported policy are permissible limitations on the insured’s liability as to third parties and do not violate the Direct Action Statute. Id. at 898. The insured’s failure to timely notify the insurer of a claim, not only precludes coverage to the insured, but also to third party plaintiff even if she sues the insurer under the Direct Action Statute. While the Louisiana Supreme Court recognized that it may be harsh that the injured third party must then rely upon the insured to timely report the claim, it reasoned to “hold otherwise would effectively convert the…claim-made-and-reported policy to an occurrence policy, resulting in the judicial modification of a bargain-for exchange between the insurer and the insured.” Id. at 897. The Louisiana Supreme Court, more broadly, also found that the Direct Action Statute “does not extend any greater right to the injured third party who was damaged by the insured.” Id. at 897. Of interest, the Gorman Court upheld the coverage denial without requiring the insurer establish it was prejudiced by the late notice—prejudice appears to no longer be part of the analysis in cases where timely notice of a claim is an issue under a claims-made policy (unlike notice issues under occurrence policies where the law requires the insurer to show prejudice to support the coverage denial).