The Office of General Counsel issued the following informal opinion on January 10, 2002, representing the position of the New York State Insurance Department.
Re: Regulation 121-Tail Coverage
1. Assuming rescission of the claims-made policy in question was proper, was the insurer required to provide extended reporting period or "tail" coverage to the insured upon the request of the insured, based upon N.Y. Comp. Codes R. & Regs. tit. 11 Part 73, (Regulation 121)?
2. Again assuming the rescission was proper, would the tail coverage commence immediately at the end of the prior policy period?
3. Does rescission of the policy fall within the definition of "termination" of policy in Regulation 121?
4. If an insurer rescinds a renewal policy "ab initio" more than 60 days after the expiration of the prior policy, but fails to notify the insured of the right to tail coverage as required by Regulation 121, does the insured retain the right to such coverage until informed by the insurer?
2. Yes, if the end of the prior period is when coverage was terminated.
3. No, but as a consequence of the rescission, there was a termination upon the expiration of the prior policy period.
An attorney purchased a claims-made professional liability policy from an insurer in July 1990 which was renewed on an annual basis through July 2000, with an agreed upon retroactive date of July 1990, back to which policy coverage would be applicable. After the policy was renewed again in July 2000 for another year, the insured advised his insurer in mid-policy period (January 2001) that a malpractice action had been commenced against the insured attorney. The insurer initially undertook defending the insured but subsequently, in March 2001, issued a written disclaimer of coverage to the insured in order to rescind the policy, based upon the insured's alleged failure to inform the insurer of the potential claim at the time of the insured's application for renewal of the policy, which commenced in July 2000. The insurer also returned all premiums paid by the insured for the period that the July 2000 policy had been in effect, as well as the insured's claim deductible paid during that period. The insurer also stated that it would withdraw its defense of the insured in the malpractice action prospectively, effective 45 days after issuance of the disclaimer.
Upon receipt of the disclaimer of coverage, the insured challenged its validity and the insurers rescission of the policy. The insured argued that even if the rescission was valid, the insured maintained the right to purchase tail coverage pursuant to the requirements of Regulation 121. The insurer thereafter refused to provide tail coverage, stating that it was under no legal obligation to do so.
N.Y. Comp. Codes R. & Regs. tit. 11, Part 73 (2000) (Regulation 121) establishes minimum standards for claims-made insurance policies issued in New York. 11 NYCRR Part 73.1(a) defines a claims-made policy as ". . . an insurance policy that covers liability for injury or damage that the insured is legally obligated to pay (including injury or damage occurring prior to the effective date of the policy, but subsequent to the retroactive date, if any), arising out of incidents, acts or omissions, as long as the claim is first made during the policy period or any extended reporting period."
Extended reporting period coverage (or "tail" coverage) is defined under 11 NYCRR Part 73.1(d) as "coverage for that period of time specified in the policy wherein claims first made after termination of coverage under the policy term, for injury or damage that occurs during the policy term, or that occurs on or after the retroactive date, if any, will be considered made during the policy term."
Therefore, the obvious benefit received from tail coverage is that it extends coverage for claims made after termination of a policy, arising from liabilities incurred back to the agreed-upon retroactive date, for an additional time period. 11 NYCRR Part 73(c)(1) requires that, upon the termination of claims-made liability coverage, ". . . extended reporting period coverage required by this Part must be available for any claims-made liability coverage provided under the policy." Further, upon the date that coverage is terminated, 11 NYCRR Part 73(d) provides that ". . . a 60 day automatic extended reporting period . . . must be provided by the insurer." (Emphasis added).
Within 30 days after termination of coverage, pursuant to 11 NYCRR Part 73.3(e)(1), ". . . the insurer must advise the insured in writing of the automatic extended period coverage and the availability of, the premium for, and the importance of purchasing additional extended reporting period coverage." (Emphasis added). Even where the termination of coverage is due to fraud, the insurer is required to advise the insured of the availability and importance of purchasing additional extended reporting coverage, consistent with Part 73.3(e)(2). The insured, pursuant to Part 73.3(e)(3)(i) and (ii), is given the greater of 60 days from the effective date of termination of coverage, or 30 days from the date that the written notice of availability was sent, to submit written acceptance of extended reporting period coverage.
The key provisions that are determinative of the question herein raised, are found in 11 NYCRR Part 73.3. These provisions provide for the length of time for which additional extended reporting coverage must be available to the insured for purchase. Part 73.3(f) requires that "Except as provided in subdivision (g) of this section, and sections 73.4 and 73.5 of this Part, upon termination of coverage, an insurer must offer the insured a three-year extended reporting period." For purposes of this inquiry, a claims-made professional liability policy for attorneys does not fall into any of the exceptions that are referenced in Part 73.3(f).
Therefore, based upon the requirements of the relevant sections of Part 73, which are referenced-above, upon termination of coverage on a claims-made professional liability policy (including fraudulent misrepresentation by the insured), an insurer is required within 30 days after the termination of coverage to advise its insured of the automatic 60-day extended reporting period and to offer the insured coverage for an additional three-year extended reporting period. When an insured does purchase additional extended reporting period coverage, Part 73.3(e)(4) states that the automatic 60-day extended period will be included within the policy period of the additional extended reporting coverage purchase.
Applying this regulatory framework to the facts presented, assuming that rescission of the claims-made professional liability policy was proper, the initial question to be addressed is whether rescission constitutes "termination of coverage" so as to invoke the right to purchase tail coverage under the regulation. Part 73.2(n) defines termination of coverage as:
"(1) cancellation or non-renewal of a policy; or
(2) decrease in limits, reduction of coverage, increased deductible or self-insured retention, new exclusion, or any other change in coverage less favorable to the insured."
A proper rescission of coverage made during the first year of a claims-made relationship would result in voiding coverage under the policy back to the policy's inception date, so that no coverage would be found to have existed. The non-existence of coverage would not meet any of the criteria necessary to constitute a termination of coverage. Therefore, in such situation, an insured would have no right to purchase additional extended reporting coverage, as there is no existing coverage that the right to purchase tail coverage would inure to.
In this situation, where the claims-made relationship has been ongoing for more than one year, the rescission by the insurer operated to rescind the last renewal policy, so that the end of the prior renewal policy became the last date that coverage was in effect. This would effectively be a non-renewal and clearly constitute a "reduction of coverage" or "other change in coverage" under Part 73.2(n)(2) and therefore would qualify as a termination of coverage. As such, the insured should have automatically been given a 60-day extended reporting period from the date of termination of coverage and should have received, within 30 days after termination, the required written communication from the insurer advising the insured of the availability and right to purchase a three-year extended reporting period.
Based upon these facts, applied to the provisions of Part 73, the insurer must offer the insured the option to purchase three year extended reporting period coverage, which would commence as of the date that coverage was terminated (the end of the last policy period). The insured has 30 days from the time written notice is mailed to purchase the optional coverage. In the event that the insured declines to purchase such coverage, the automatic 60 day reporting period should be added to the date that the claims-made policy was terminated. However, in the instant situation, unless the optional coverage is purchased, there would be no coverage for the claim because it was filed in January 2001, which would be past the 60-day reporting period added to the termination date, which was the end of the last policy period.
For further information you may contact Supervising Attorney Lawrence Fuchsberg at the New York City Office.