East Texas Medical Center Regional Health Care System v. Lexington Insurance Co. presents a rather interesting variation on the theme of whether an insured has properly reported a claim under a claims-made liability insurance policy. No. 07-40904, 2009 WL 1982368 (5th Cir. July 10, 2009). Lexington Insurance Company issued to East Texas Medical Center a $5 million claims-made medical-malpractice liability policy. The policy provided excess liability insurance coverage to the medical center, covering claims above a self-insured retention of $2 million per claim.
Under its arrangement with Lexington, East Texas had responsibility for processing claims and monitoring all incidents potentially giving rise to medical malpractice claims (“medical incidents”). East Texas had discretion to resolve any claim within its $2 million retention. If Lexington was notified of a claim by East Texas, Lexington had discretion to decide which claims it would investigate or otherwise pursue.
East Texas was required to provide “written notice” to Lexington of medical incidents, claims, and lawsuits. East Texas was also required to send “immediately” to Lexington copies of any demands, notices, summonses, or legal papers received in connection with a claim or lawsuit.
In March 2003, East Texas received a medical-malpractice claim that was in the form of a Texas “4590i letter” on behalf of David Cornelius. A 4590i letter is a statutorily mandated written notification to a health care provider that an injured party is asserting a liability claim against the medical provider. Under the Texas statutes, a 4590i letter must be submitted to the health care provider at least 60 days before the filing of a suit, based on a health care liability claim. 2009 WL 1982368, at *2.
In April 2003, East Texas entered information about the Cornelius claim on a computer-generated loss run. East Texas included approximately 40 claimants on each loss run. The loss run estimated the value of the Cornelius claim at only $25,000. East Texas submitted the loss run to Lexington, which identified the type of claim, the initial reserve, and the status of the claim.
On May 27, 2003, Cornelius filed a medical-malpractice lawsuit against East Texas. Two weeks later, on June 8, 2003, the Lexington policy expired. At the time, East Texas did not consider the Cornelius lawsuit to present a high risk of liability exposure, nor did East Texas believe that its liability for the claim would exceed its SIR.
Following depositions in the Cornelius lawsuit in December 2003, East Texas realized for the first time that its liability for the lawsuit was likely to exceed its $2 million SIR. After the Cornelius suit was filed, East Texas estimated its value to be in excess of $10 million. East Texas then submitted written notice to Lexington of the Cornelius lawsuit, furnishing copies for the claim and suit papers. Lexington denied coverage on the basis that East Texas had failed to comply with the policy’s notice provisions. Id.
The court observed that there was “no language in the policy that limits ‘written notice’ to a particular format.” 2009 WL 1982368, at *4. Lexington elicited testimony from experts that, even if a loss run contained all of the necessary information regarding the claim, the loss run would not qualify as an individual and official report of the claim. The court, however, determined that the weight of such testimony was for jurors to consider. Id.
The court concluded that the requirement that East Texas provide “a written notice of any claim” was ambiguous. On this conclusion, the court affirmed the jury’s judgment that a loss run could provide notice of claims. Id.
The court determined that “the policy required separate notice of claim and of suit.” 2009 WL 1982368, at *5. The court noted that East Texas did not provide Lexington with notice of the Cornelius suit until seven months after the policy expired. East Texas argued that the disjunctive construction of the phrase “notice of the claim or suit” indicated that only one or the other was required for a given medical incident. The court rejected this interpretation as unreasonable. Id. Rather, the court concluded that “if the insured had an option of which of the two events to report for any given medical incident, it would mean, as here, that the Medical Center was not required to report a suit subsequent to a claim so long as it had reported the claim.” Id.
The court further held that, under Texas law, an insurer under a claims-made policy must show that it was prejudiced by the lack of prompt notice. 2009 WL 1982368, at *6. Texas law distinguishes between a claims-made policy, which requires “no showing of prejudice . . . before late notice bars coverage,” and occurrence policies, where “prejudice must be shown before inadequacies notice will bar a claim.” Id. Nonetheless, the court explained that Texas law makes a distinction between an insured’s obligation to report a claim within the policy period of a claims-made policy and a requirement that the claim be reported as soon as practicable. The latter requirement requires a showing of prejudice by the insurer to bar coverage. 2009 WL 1982368, at *8.
The court concluded that the Lexington policy required two separate notices, notice of a claim, and notice of a suit. Id. The court did not “find that a second notice, the one given up to filing of a suit, is directed to the temporal boundaries of the policy’s basic coverage terms.” Id. Rather, “notice of suit does not need to be given within the coverage period or any other reporting time.” Id. The court explained “that is because a suit based on a claim that arose during the policy period might not be filed until long after the policy’s end.” Id. That is, “as long as notice of the underlying claim had been timely given, coverage would exist under either a claims-made or claims-made and reported policy.” Id. On these conclusions, the court held that “notice of suit is an obligation that is subject to the need to show prejudice.” Id.
