A medical malpractice insurance company insured a doctor pursuant to a “claims made” policy. Under a “claims made” policy, coverage is only triggered when, during the policy period, an insured becomes aware of and notifies the insurer of either claims against the insured or occurrences that might give rise to such a claim. In a “claims made” policy, the notice is the event that invokes coverage under the policy. Clear notice of a claim or occurrence during the policy period is crucial, because allowing actual notice beyond the policy period would constitute an unbargained for expansion of coverage, gratis, resulting in the insurance company's exposure to a risk substantially broader than that expressly insured against in the policy. “Claims made” policies are often a more economical way to provide coverage for risks like professional responsibility, because the notice requirements allow an insurer to close its books on a policy at the expiration date and thus attain a level of predictability unattainable under standard occurrence policies. This type of policy reduces the potential exposure of the insurer, thus reducing the policy cost to the insured.
During the period the doctor was insured, the doctor operated on a man. As a result of the doctor's negligence during the operation, the man died. The Oklahoma Board of Medical Licensure revoked the doctor's license for performing surgery while impaired by the pain medication Vicodin.
Four days after his medical license was revoked, the doctor wrote to his insurer and asked that his policy be cancelled and his insurance premiums refunded. At the time the insurer cancelled the doctor’s policy, the insurer’s vice-president of underwriting was aware that the doctor’s license had been revoked and considered the fact that the doctor was no longer licensed in its decision to cancel the policy.
Twelve days after the doctor’s license was revoked, the insurer notified the doctor by letter that the policy had been cancelled effective the date he lost his license. The letter also offered to sell him tail coverage. In a “claims made” policy, the risk of tail liability is borne by the insured, absent the purchase of tail coverage for claims filed after the cancellation or termination of a policy. That letter was followed by another that addressed the premium refund issues and stated that the policy had been cancelled at the doctor's request.
Less than three months after the license was revoked, the decedent’s personal representative filed suit against the doctor and others for the man’s wrongful death. The doctor forwarded the petition and summons served on him to the insurer about a month later. A week after the doctor forwarded the petition and summons to the insurer, the insurer sent the doctor a letter denying coverage because the claim was not made until after the policy was cancelled and asserting the policy exclusion for acts performed while under the influence of intoxicating substances.
The doctor's debts were discharged in bankruptcy. The personal representative filed a motion for summary judgment against the doctor. The doctor entered into a Consent Judgment with the personal representative in the amount of $2,250,000.00. The trial court granted summary judgment in favor of the personal representative and ruled that the doctor was entitled to a set off by virtue of settlements with other parties in the amount of $1,275,000 .00.
The personal representative filed garnishment proceedings against the doctor’s insurer. The personal representative asserted that the doctor is indebted to the personal representative in the amount of $975,000.00 plus pre and post judgment interest. The insurer denied any indebtedness asserting a lack of coverage under any insurance policy. Both the personal representative and the insurer filed motions for summary judgment in the garnishment action. The McCurtain County District Court entered summary judgment in favor of the personal representative, holding that cancellation of the policy violated section 3625 of title 36 and was therefore void. Section 3625 of the Insurance Code provides:
No insurance contract insuring against loss or damage through legal liability for the bodily injury or death by accident of any individual, or for damage to the property of any person, shall be retroactively annulled by any agreement between the insurer and the insured after the occurrence of any such injury, death, or damage for which the insured may be liable, and any such attempted annulment shall be void.
Okla. Stat. tit. 36, § 3625 (2011). The provision dates to the enactment of the Insurance Code in 1957.
The Court of Civil Appeals reversed the summary judgment and remanded the matter with instructions to enter judgment for the insurer.
The Supreme Court of Oklahoma vacated the opinion of the appellate court and affirmed the judgment of the trial court. The court held that the statutory prohibition against cancellation of a policy with knowledge of potential claims was applicable to “claims made” policies, there was an agreement between the insurer and the insured to cancel the policy, and the insurer had knowledge of the potential claim at the time of the cancellation.
The statutory prohibition on retroactive annulment of an insurance policy following the injury, death, or damage for which the insured may have been liable was applicable to “claims made” policies. Therefore, the medical malpractice insurer was not permitted to agree to cancel a “claims made” policy with the knowledge that a potential claim was pending. The statute's focus was the protection of injured third parties, not on policy provisions. Section 3625 of title 36 limited the ability of the parties to an insurance contract to manipulate the term of policy coverage in a way that prevented an injured third party from asserting a claim. The statute did not expressly apply only to occurrence policies. Under a “claims made” policy, coverage is only triggered when, during the policy period, an insured becomes aware of and notifies the insurer of either claims against the insured or occurrences that might give rise to such a claim. In a “claims made” policy, the notice is the event that invokes coverage under the policy. “Occurrence liability” policies, as opposed to “claims made” policies, allow for notice after the term of the insurance contract, so long as the insurable event occurred during the term, because these policies historically covered identifiable events such as collision, fire and war. Section 3625 of title 36 applies to a “claims made” policy only when there is an agreement to cancel the policy in a way that cuts off a potential claim and the insurer is actually aware at the time of the agreement to cancel of the act or acts that will potentially result in a claim. The court concluded that an insurer may not agree to cancel a “claims made” policy with the knowledge that a potential claim is pending without violating section 3625 of title 36.
There was an agreement between the medical malpractice insurer and the doctor to cancel the “claims made” policy. A written offer was made by the doctor to cancel the policy and obtain a refund of policy premiums, and the medical malpractice insurer accepted this offer. Therefore, section 3625 of title 36 applied to preclude cancellation of the policy if the insurer had knowledge of a pending potential claim.
The medical malpractice insurer had knowledge of the potential claim at the time of the cancellation. The medical malpractice insurer had notice of the revocation of the doctor's medical license due to alleged malpractice prior to the cancellation of the policy. Therefore, the medical malpractice insurer was precluded by section 3625 of title 36 from canceling the doctor’s “claims made” policy.
The Supreme Court of Oklahoma vacated the opinion of the appellate court and affirmed the judgment of the trial court in favor of the personal representative.
See: Chandler v. Valentine, 2014 WL 2854703, 2014 OK 61 (Okla., June 24, 2014) (not designated for publication).
See also Medical Law Perspectives, January 2014 Report: Prescription Painkillers: Risks for Patients, Pharmacists, and Physicians