The United States District Court for the Middle District of Louisiana has held that claims-made-and-reported policies do not violate a Louisiana statute that prohibits insurance contracts from limiting the insured’s right of action against the insurer to a period of less than one year from the time when the cause of action accrues, because claims-made-and-reported policies define the scope of coverage rather than limit the insured’s right of action. Treo Staffing, LLC v. AXIS Surplus Ins. Co., 2016 WL 923112 (M.D. La. Mar. 10, 2016).
The insured, a labor staffing company, purchased a professional liability policy covering the period from April 13, 2013 to April 13, 2014. The policy was a claims-made-and-reported policy and thus required that a claim first be made against the insured and reported to the insurer in writing within the policy period. On October 24, 2014, the insured received notice from the Department of Labor that its overtime policies violated the Fair Labor Standards Act. The insured entered into a consent decree with the Department of Labor, under which it was required to pay workers approximately $600,000 in back overtime. On November 5, 2014, the insured submitted the claim to its insurer for coverage. The insurer denied coverage because the claim was neither made nor reported during the policy period.
The insured contended that the requirement limiting coverage to claims made and reported within the policy period was void pursuant to a Louisiana statute that prohibits an insurance contract from containing “any condition, stipulation, or agreement limiting right of action against the insurer . . . to a period of less than one year from the time when the cause of action accrues.” The court ruled in favor of the insurer, holding that claims-made-and-reported policies do not violate the Louisiana law because such policies limit coverage for claims but do not limit the insured’s right of action against the insurer. The court found that viewing a claims-made policy as limiting the insured’s right of action would convert claims-made policies into occurrence policies and change the bargained-for exchange between the insurer and the insured. Therefore, the court refused to interpret the statute as prohibiting claims-made policy provisions that limit coverage to claims first made and reported during the policy period. The court thus held that the policy’s limiting language did not violate the statute and that the insurer did not act in bad faith by denying coverage.