The Fine Print in Claims-Made Policies: When a Claim Is Not a Claim

The interpretation of what constitutes a claim under a claims-made policy is often a contentious issue. Ambiguities in policy wording frequently lead to disagreements between policyholders and insurers over whether specific events or circumstances trigger coverage.

Frequently, policyholders fail to understand what qualifies as a claim under their policy. This misunderstanding often results in insurers rejecting claims on the grounds that the policyholder did not notify the insurer timeously or, in some cases, at all. Such failures can leave policyholders exposed to substantial out-of-pocket expenses.

This issue of ambiguity in what constitutes a claim was at the heart of the recent case of Steadfast Insurance Co. v. Shambaugh & Son, L.P., heard in Connecticut, United States. Plaintiffs in a product liability case served a subpoena on the insured, identifying it as a distributor of the products at issue and submitted a chart to the court naming the insured as a potential future defendant. In response to the subpoena, the insured incurred over $1.7 million in legal fees and sought indemnification under its professional liability insurance policy.

The insurer denied the claim, asserting that neither the subpoena nor the litigation chart amounted to a “claim” under the policy. The policy defined a “claim” as “a demand received by the insured seeking a remedy and alleging liability or responsibility for loss.” Coverage litigation subsequently ensued.

The court analysed the term “claim” and agreed with the insurer’s interpretation, concluding that the subpoena and chart did not constitute a “claim” under the policy. It reasoned that both the subpoena and the chart merely identified the insured as a distributor of the products in question and a potential future defendant. Critically, neither document asserted liability against the insured nor sought any form of remedy, which are necessary elements for an event to qualify as a “claim” under the policy.

The court further held that the subpoena and chart could not qualify as claims because the costs incurred by the insured to respond to the subpoena did not meet the policy’s definition of a “loss.” According to the policy, “loss” included “claim expenses,” which were specifically defined to cover fees charged by attorneys appointed by the insurer or other expenses associated with investigating, adjusting, defending, or appealing a claim, provided they were authorised by the insurer. In this case, the legal fees incurred by the insured were neither charged by attorneys designated by the insurer nor authorised by the insurer. As a result, the court found that these costs did not constitute a recoverable “loss” under the terms of the policy.

In conclusion, ambiguity in what constitutes a claim under a claims-made policy often results in costly disputes. Insurers should ensure that definitions of key terms like “claim” are clear, while policyholders must carefully review and seek clarification on policy terms to ensure they fully understand their obligations. By doing so, both parties can minimise disputes and streamline the claims process.

Jean-Paul Rudd

Partner | Attorney

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