Campbell & Co. v. Utica Mutual Insurance , 36 Ark. App. 143 ( 1991 )

Elizabeth W. Danielson, Judge.

In June of 1989 appellant Campbell & Company obtained a default judgment against Bloomburg Insurance Agency based on Bloomburg’s negligent failure to insure. Appellant then sued appellee Utica Mutual Insurance Company pursuant to an errors and omissions policy appellee had issued to Bloomburg. Appellee moved for summary judgment based on the facts that no claim was made against the insured and no written notice was given to appellee during the policy period, both of which were required under the terms of the policy. Appellant contends on appeal that the trial court erred in granting the motion for summary judgment. We affirm.

Our summary judgment procedure is designed to prevent unnecessary trials where the record shows there is no genuine issue of fact to be litigated. Krantz v. Mills, 240 Ark. 872, 402 S.W.2d 661 (1966). Summary judgment is an extreme remedy, and on appeal from the granting of a motion for summary judgment, we review the evidence in the light most favorable to the party resisting the motion. Moeller v. Theis Realty, Inc., 13 Ark. App. 266, 683 S.W.2d 239 (1985). The appellee has the burden of proving that even though the facts might be in dispute, reasonable minds could not differ as to the conclusion to be drawn from them. Id.

In March of 1986 appellant was asked to procure an insurance policy to cover a piece of logging equipment. Appellant in turn went to Bloomburg, who gave an oral binder to place coverage with one of its authorized companies and accepted the premium.

The insured property was destroyed in September of 1986 and the loss was reported to Bloomburg. Although Bloomburg retained an adjuster and purported to be investigating the claim, it was later discovered that Bloomburg had failed to obtain the coverage. Appellant ultimately paid $40,000 to settle the claim and subsequently received a $40,000 default judgment against Bloomburg.

At the time of the loss of the equipment, Bloomburg had an errors and omissions policy issued by appellee. Prior to the settlement of the claim and the subsequent default judgment against Bloomburg, appellant contacted appellee about the claim, demanding that appellee undertake the defense of Bloom-burg. Appellee denied coverage and refused to defend, maintaining that the conditions precedent to its liability under the policy had not been met. Appellant was awarded a default judgment against Bloomburg, then pursued the claim directly against appellee for payment of the judgment.

The errors and omissions policy issued to Bloomburg by appellee covered the period from April 7, 1986 to April 7, 1987. The policy was a “claims-made” policy, which provides coverage only if a claim is presented during the policy period, in contrast to an “occurrence” policy, which provides coverage if the event insured against takes place within the policy period, regardless of when the claim is presented. The policy issued to Bloomburg provides, in pertinent part, as follows:

[The insurer agrees] to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as money damages because of any claim or claims first made against the Insured during the policy period, arising out of any negligent act, error or omission, occurring subsequent to the retroactive date. . .

A claim is first made during the policy period... if during the policy period ... the insured shall have knowledge or become aware of any negligent act, error or omission which could reasonably be expected to give rise to a claim under this policy and shall during the policy period . . . give written notice thereof to the company.

(Emphasis supplied.) Coverage is therefore provided under this policy when two conditions are met: first, a claim based on the insured’s negligent acts must be made against the insured during the policy period, and second, written notice of the claim must be given to Utica during the policy period. Although the loss occurred during the policy period and Bloomburg was made aware of it, no claim based on Bloomburg’s negligence was made against Bloomburg during this time. The first notice appellee received regarding the claim was in May of 1988, more than a year after the expiration of the policy. Because no claim was made against the insured and no written notice was given to appellee during the policy period, the trial court granted appellee’s motion for summary judgment.

Campbell’s first argument on appeal is that the trial court erred in granting summary judgment because appellee had actual notice during the policy period of another claim against Bloom-burg and that Bloomburg’s owner had disappeared. Appellant contends that because of this knowledge, appellee had notice that additional claims would be forthcoming. The basis of this contention is a report filed on April 8, 1987, with appellee by its employee, Mr. Trzcinski. The report revealed that in March of 1987, appellee was informed of a lawsuit against Bloomburg by D. E. Thompson, a resident of Georgia. Thompson had applied for property insurance through a Georgia agency, which had in turn orally bound the risk with Bloomburg. After the property was destroyed, it was discovered that Bloomburg had taken the premium but never obtained the coverage. After attempting to contact Bloomburg and finding the telephone had been disconnected, Mr. Trzcinski stated in his report, “I can only deduce that there is a possibility that this insured (Bloomburg) had either some sort of financial problems or simply took premium dollars from clients and/or other agents and never placed the coverage.” Appellant contends that this April 8, 1987, report gave appellee actual notice of its claim.

In Safeco Title Ins.Co. v. Gannon, 774 P.2d 30 (Wash. App. 1989), the Washington Court of Appeals denied coverage under a claims-made policy even though the insurer knew of the event giving rise to the suit. Gannon, who had a claims-made policy with Safeco, notarized a signature that turned out to be a forgery. Gannon’s insurance policy was effective from May 20, 1982 to May 20,1983. On January 20,1983, an attorney notified Gannon of the forgery and he notified his employer, who had processed the forged deed of trust. Around January 28 Gannon was notified by an agent of Safeco that there was a forgery and that Gannon should see his attorney. Gannon contended on appeal that these facts constituted notice of Safeco’s “imminent subrogation claim,” but the Washington Court of Appeals held that these facts did not constitute a demand for compensation. Instead, the court said, these were facts and circumstances that later gave rise to Safeco’s claim, and, accordingly, “no claim was made by [appellant Gannon against Safeco] within the policy period and appellant was thus not entitled to receive coverage under the claims made clause.” 774 P.2d 30 at 33.

As appellee points out, Mr. Trzcinski’s report makes absolutely no reference to appellant or the loss involved in this case, and dealt with an entirely separate event involving an insured and insurance agent in Georgia. The existence of appellant’s claim could not be ascertained from the report. Mr. Trzcinski’s deduction that Bloomburg was in financial trouble and may have taken premiums from clients or agents in no way constitutes notice that appellant had a claim against Bloomburg. Mere suspicion that something is awry cannot be said to provide notice of a particular claim involving specific parties of which the insurer has no knowledge. Because the report dealt with an entirely separate event from the instant claim and the existence of this claim could not be ascertained from the information in the report, we hold that the report did not constitute actual notice of appellant’s claim.

Appellant contends that the adequacy of notice is a question for the jury and cites cases in which the adequacy of the notice question was properly presented to the jury. The question here, however, is not whether the notice given was adequate, but whether the knowledge of an unrelated claim constituted notice at all under the terms of the policy. In Reynolds v. New York Life Ins. Co., 202 Ark. 1013, 154 S.W.2d 817 (1941), the supreme court stated that it is the function of the court to construe insurance policies in litigation, ascertain their meaning, and give effect thereto. The construction and legal effect of a written contract are to be determined by the court as a question of law except where the meaning of the language depends upon disputed extrinsic evidence. Duvall v. Massachusetts Indem. & Life Ins. Co., 295 Ark. 412, 748 S.W.2d 650 (1988). The information in Mr. Trzcinski’s report did not constitute notice to appellee as required by the policy and the trial court did not err in granting summary judgment.

Appellant’s second contention is that the trial court erred in granting summary judgment in favor of appellee in that Bloomburg had concealed the loss and intentionally failed to notify appellee of the claims during the policy period, and that the refusal of an insured to notify its carrier should not deprive the innocent injured party of recovery. In Southern Farm Bur. Cas. Co. v. Jackson, 262 Ark. 152, 555 S.W.2d 4. (1977), the court reversed a decision in favor of the injured parties, stating that since the injured parties’ rights were no greater than the insured’s and the insured could not enforce the liability policy against the defense of failure to cooperate, the trial court should have entered a verdict in favor of the insurer; the injured person stands in the shoesof the insured. 262 Ark. 152 at 157-158. Although Jackson involved an automobile liability policy, we believe the same principle applies under the circumstances of this case. Since Bloomburg could not enforce the policy against the defense that no claim was made within the policy limitations, and appellant’s rights were no greater than Bloomburg’s, the trial court did not err in granting summary judgment in favor of appellee.

As part of its second argument on appeal appellant also contends that appellee had waived its right to raise the lack of timely notice because in a June 14, 1988, letter to Bloomburg, appellee disclaimed coverage for the reason that “the date of the first notice of claim made against you in this instance case... is subsequent to your expiration date of April 7, 1987.” Appellant argues that Bloomburg first had notice of the loss within a few days of its occurrence, not in January of 1988 as stated in appellee’s letter, and that where an insurance company disclaims coverage on one ground or set of grounds, it has waived any other grounds of which it had knowledge at the time. We agree with appellee’s statement that this argument misses the principal issue in this case, which is not whether there is a defense to appellee’s liability that appellee waived or is estopped from asserting, but whether there was any coverage under the policy for appellant’s claim in the first place. This court has said that “it is well settled in this state that the doctrines of waiver and estoppel, based upon the conduct or action of the insurer, cannot be used to extend the coverage of an insurance policy to a risk not covered by its terms or expressly excluded therefrom.” Brown v. Cudis Ins. Society, Inc., 11 Ark. App. 255, 669 S.W.2d 207 (1984), citing Life & Cas. Ins. Co. v. Nicholson, 246 Ark. 570, 439 S.W.2d 648 (1969).

Appellant’s third point on appeal is that the trial court erred in granting summary judgment because there was no showing that appellee was prejudiced by the failure to receive timely notice. The position that an insurer must show it was prejudiced by lack of notice in order to escape liability or its duty to defend is based on the reasoning that the purpose of the notice requirement is to give the insurer an opportunity to investigate, so that the insured’s rights should not be forfeited unless the insurer shows, for example, that it did not have an opportunity to investigate and was thereby prejudiced. See Charles B. Marvel, Annotation, Modern Status of Rules Requiring Liability Insurer to Show Prejudice to Escape Liability Because of Insured’s Failure or Delay in Giving Notice of Accident or Claim, or in Forwarding Suit Papers, 32A.L.R. 4th 141 (1984). The notice prejudice rule was “created fundamentally to preserve the insured’s coverage in those cases where the lack of notice does not prejudice the insurer.” Safeco Title Ins. Co. v. Gannon, 11A P.2d 30 at 34 (Wash. App. 1989).

We are aware of no Arkansas law on the issue of whether the notice/prejudice rule applies to claims-made policies; our discussions on whether prejudice must be shown have dealt with occurrence-type policies. See, e.g., American Fidelity & Cas. Co. v. Northeast Arkansas Bus Lines, Inc., 201 Ark. 622, 146 S.W.2d 165 (1941); Hope Spoke Co. v. Maryland Cas. Co., 102 Ark. 1, 143 S.W. 85 (1912); American General Life Ins. v. First American Nat’l Bank, 19 Ark. App. 13, 716 S.W.2d 205 (1986). The federal district court has reviewed Arkansas case law and determined that where a notice requirement is a condition precedent, the insurer is not required to show that he is injured or prejudiced by the failure of the insured to provide the required notice. Hartford Accident and Indemnity Co. v. Loyd, 173 F. Supp. 7 at 11 (W.D. Ark. 1959); M.F.A. Mutual Ins. Co. v. Mullin, 156 F. Supp. 445 at 460 (W.D. Ark. 1957).

We agree with the court in Safeco that “[wjhile there are sound reasons for applying the notice prejudice rule to the typical notice provision in an occurrence policy, those reasons do not apply with equal force to the notice provision [in a claims-made policy].” 774 P.2d 30 at 34. A claims-made policy is designed so that the insurer can more accurately predict the limits of its exposure and the premium needed to cover the risk undertaken. The benefit to the insured is a lower premium than would be necessary in an occurrence policy. 7A J. Appleman, Insurance Law and Practice § 4504.01 (Supp. 1990). Notice is critical to the insurer in a claims-made policy; it not only gives the insurer an opportunity to investigate, it defines the very risk the insurer contracted to undertake. To allow an extension of reporting time where the insurer failed to demonstrate prejudice in a claims-made policy would extend the coverage the parties contracted for and, in effect, rewrite the contract between the parties. See Safeco, 774 P.2d 30 at 34. Because the notice requirement defines the coverage contracted for in a claims-made policy and is a condition precedent to coverage, we hold that the insurer is not required to demonstrate prejudice caused by the untimely filing of notice under a claims-made policy such as the one in this case.

Since there was no claim made against Bloomburg and no notice given to appellee during the time Bloomburg’s errors and omissions policy was in effect, appellant’s claim was not covered by the policy and the trial court properly granted summary judgment in favor of appellee.

Affirmed.

Rogers, J., concurs. Cooper and Mayfield, JJ., dissent.