CHAPTER 7 CONDITIONS, WARRANTIES, AND EXCLUSIONS

• Jurisdiction: United States

A. Conditions

The word "condition" in contract law refers to an event, the occurrence or non-occurrence of which alters the previously existing relations of the parties to a contract by creating or extinguishing a legal duty. The condition in an insurance policy imposes duties on the insured (the promisor) and gives a corresponding right to the insurer (the promisee). Breach of a condition in an insurance policy gives the insurer legal justification for refusing to perform its obligations under the policy.

A condition precedent is an act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises. Consistent with the plain meaning of the term "provided that," courts in other jurisdictions have recognized that use of this phrase will generally create a condition precedent.

In MBE Collection, Inc. v. Westfield Cos., 2002 WL 598320, 79585 (Ohio App. Apr. 18, 2002), MBE Collections appealed the decision of the Cuyahoga County Court of Common Pleas in granting motions for summary judgment for Westfield Companies, Inc. and James B. Oswald Company. Westfield had investigated the claim by MBE and informed them that coverage of the lawsuit was denied for failure to comply with the express notice provisions of the policy.

It is well established in Ohio that liability and negligence will not lie in the absence of a duty owed by the defendant.

The notice provision in an insurance contract acts as a condition precedent. A condition precedent is a promise made by a party to the contract to do something called for by the policy before that person can expect any action by the other party to the contract. A party claiming insurance coverage has the burden of establishing compliance with all provisions of the insurance policy that are precedent to his right to recover, and the notice provision is such a condition precedent. In addition, a person has a duty to examine the coverage provided and is charged with acquiring knowledge of the contents of his or her own policy. Courts have further concluded that when notice under an insurance contract is required, an insurer may deny coverage when notice was not given because the delay would prejudice the insurer in protecting its interests.

In this case, the insured defended and settled a lawsuit in 1997 and waited until July 1999 before informing Westfield that a suit had occurred and that a settlement agreement had been executed.

The insured, even with the belief that her insurance covered the lawsuit, failed to satisfy any of the notice requirements under the insurance policy. The insured failed to send written notice after receiving the cease and desist letter, failed to forward any other materials dealing with the lawsuit, e.g., summons and complaint; and failed to inform the appellee that a settlement between the parties was being negotiated. To now hold the insurance company liable for the appellant's claim would unquestionably prejudice the insurer and directly contradict the notice provisions that both parties agreed to when entering into the insurance policy.

Most states now recognize the "notice-prejudice rule." Under the notice-prejudice rule, an insured who gives late notice of a claim to his or her insurer does not lose coverage benefits unless the insurer proves by a preponderance of the evidence that the late notice prejudiced its interests. Under that rule, an insurer can deny benefits only where its ability to investigate or defend the insured's claim was compromised by the insured's failure to provide timely notice.

1. Insured Must Fulfill Policy Conditions

It seems lawyers and litigants refuse to accept what I have stated until I am blue in the face: insurance contracts are mutual agreements where both parties are obligated to treat each other with good faith and fair dealing and do nothing that will deprive the other of the benefits of the contract.

In Allstate Ins. Co. v. Mack, 61 N.E. 3d 1011, 406 Ill. Dec. 743 (Ill. App. Ct. 2016), the insured, Vanity Mack, failed or refused to provide HIPAA authorization forms and appear for examination under oath as required by the underinsured motorist (UIM) claim she had initiated against the plaintiff, Allstate Insurance Company. Allstate sought a declaratory judgment in the circuit court, seeking a declaration that the defendant breached the parties' contract by refusing to provide executed HIPAA authorization forms and to submit to an oral examination under oath.

When the parties filed cross-motions for summary judgment, they conceded that there were no genuine issues of material fact and invited the court to decide the questions presented as a matter of law. If the words in the policy are clear and unambiguous, a court will afford them their plain, ordinary meaning and will apply them as written. We find the terms of the insurance policy at issue here were clear and unambiguous. Under the section dedicated to UIMs' insurance coverage, the parties' policy stated the following:

Proof of Claim; Medical Reports

As soon as possible, any person making [a] claim must give us written proof of [the] claim. It must include all details we may need to determine the amounts payable. We may also require any person making [a] claim to submit to [an] examination under oath and sign the transcript.

The insured person may be required to take medical examinations by physicians we choose, as often as we reasonably require. We must be given authorization to obtain medical reports and copies of records.

Therefore, according to the plain policy language, in order to make a UIM claim, Mack was required to provide written proof of the claim with "all details Allstate may need to determine the amounts payable." This included executing a non-optional authorization to obtain medical reports and copies of records, along with possibly having to submit to an oral examination under oath.

All Vanity Mack needed to do to obtain UIM benefits from Allstate was to provide a signed HIPAA release and arrange to testify at EUO. She did neither and preferred to take the chance on suing Allstate for wrongfully denying her claim. Her gamble was a failure and she recovered nothing because she refused to fulfill the contract requirements.

2. Notice of Claims Condition

A claims made and reported policy is aptly named: it requires that a claim be both made and reported to the insurer during the policy period for the coverage to apply. Insureds who know of a claim against them must report it to the insurer before the expiration of the policy or lose all coverages.

In Alaska Interstate Constr., LLC v. Crum & Forster Specialty Ins. Co., Slip Copy, 2015 WL 7253673 (D. Alaska Nov. 17, 2015), plaintiff Alaska Interstate Construction, LLC ("AIC") sued Crum & Forster Specialty Insurance Company, Inc. (C&F) as a result of C&F's refusal to provide liability insurance coverage. AIC sought coverage from C&F in response to a lawsuit filed by VC Sellers Reserve ("VC Sellers") in the Superior Court for the State of Alaska. AIC asserted that its policy from C&F provided coverage for the underlying suit and C&F is therefore obligated to both defend and indemnify AIC. C&F has disclaimed any obligation to provide coverage under the suit.

C&F denied coverage because the claim was not reported during the policy period, because certain wrongful acts were committed prior to retroactive coverage, and because AIC knew of and failed to report the wrongful acts prior to renewal of the policy. AIC filed the present suit seeking a determination on the existence of coverage.

AIC conceded two important facts. First, that a claim was first made against it on or about January 10, 2013. And second, that this claim was not reported to C&F in any way until June 20, 2013. The language of the policies indicate that these are claims-made policies, rather than occurrence based policies. For claims-made policies, giving notice within the policy period is what actually creates coverage in the first instance.

AIC appears to have taken a gamble by choosing to not report the claim against it to C&F before the policy was renewed. This may have been in hopes that the claim would in fact go away permanently if they dropped their suit against VC Sellers and the unreported claim would not negatively affect AIC's insurance premiums under future renewal policies. Had AIC reported the claim soon after it was made in January 10, 2013, or any time before the explicit policy end date of May 1, 2013, there would be no question of coverage.

Similar to other states in this circuit, the Alaska Supreme Court would not extend the "notice-prejudice" rule to "claims-made" policies. Because of AIC's failure to meet the policy requirement that the claim be both made and reported during the policy period, there is no possibility of coverage and C&F has no duty to defend or indemnify AIC in the underlying suit.

Even if AIC were to assert that the claim was made and reported during the second policy period, when the Underlying Suit was filed and then reported to C&F, there is no coverage because they knew of the wrongful act before obtaining the renewal. Therefore, without valid coverage, C&F has no duty to indemnify or defend.

Insurance coverage is not a place for gambling. In this case AIC gambled and lost by not reporting the claim when it learned about it and not reporting the existence of the claim when it renewed its policy with C&F. The "notice prejudice rule" applies to occurrence polices but cannot fit within a claims made and reported policy.

B. Warranties

Certain policies contain the term "warranty." A warranty in an insurance policy is a special kind of representation or promise made by an insured where the person seeking insurance promises that the statements of fact are absolutely true, that they know that the insurer is relying on the truthfulness of the statements, and that each statement of fact is material to the decision of the insurer to...