Prior Knowledge Condition Bars Coverage Where Insured was Warned of Negligence Claim Before Policy Incepted
The California Court of Appeal has held that a prior knowledge condition barred coverage for a claim brought against an insured because the insured was warned prior to the policy’s inception that it would face a claim for professional negligence. Admiral Ins. Co. v. Superior Court, 2017 WL 5590076 (Cal. Ct. App. Nov. 21, 2017). Despite an ambiguity in the policy application, the court held that the prior warnings of the professional negligence claim were sufficient to trigger the exclusion.
The insured company matches aspiring parents with surrogates and egg donors. In 2011, two clients utilized the insured’s services, but their child was born with a rare form of eye cancer. In June 2012, a lawyer sent the insured three letters on behalf of the clients declaring their intent to file a complaint against the insured for “negligent and unprofessional . . . conduct, while in the performance of professional duties.” In October 2012, when the insured applied for a commercial liability policy for the period of December 5, 2012 through December 5, 2013, it failed to disclose the letters as the potential basis for a claim. In March 2013, the clients filed a complaint alleging professional negligence, and the insured tendered the claim to the insurer.
The insurer denied coverage based on the terms of the prior knowledge condition contained in the policy, which afforded specified coverage only for a “professional incident . . . provided that prior to the inception date of the policy, no insured knew, nor could have reasonably foreseen, that the professional incident might result in a claim.” The insured, on the other hand, argued that the policy application, asking whether the insured was “aware of any act, error, omission, fact, circumstance, or records request from any attorney which may result in a malpractice claim or suit,” was ambiguous because the insured is not a licensed healthcare provider, does not employ doctors and nurses, and does not generally face “malpractice” claims. The trial court denied the insurer’s motion for summary judgment, concluding that the application form and the prior knowledge condition created triable issues of fact. The insurer appealed.
The Court of Appeal reversed, holding that the insurer was entitled to summary judgment because the policy itself plainly precluded coverage for any potential claims not disclosed by the insured. The appellate court acknowledged the potential ambiguity in the policy application, stating that the application “was plainly designed for medical laboratories, imaging centers, and similar health care facilities” and that the insured “was not being untruthful when it represented on the application form that it was unaware of any existing basis for a ‘malpractice claim.’” Nevertheless, the court concluded that the policy, as opposed to the application, “only requires that the insured be able to foresee that a claim ‘might’ be made.” Thus, notwithstanding the truth of the statement on the application, the undisclosed letters sent by the lawyer were sufficient to preclude coverage based on the prior knowledge condition contained in the policy.