The Cruel World of Insurance Policies

In the recent case of Certain Underwriters at Lloyd’s of London v All Spec Home Inspections and Mario Lucciola, the Court considered the availability of insurance coverage to a home inspector who missed a critical electrical problem on a home inspection resulting in a contractor’s death. At the very end of the decision, the Judge made reference to the “cruel world of claims-made-and-reported policies of insurance.” While colourful language of this nature is not unusual for the particular Judge in this case, it is not language that one sees very often.  Nevertheless, the facts of this case show how appropriate they are.

Mr. Lucciola, a self-employed home inspector, conducted an inspection of a property in St. Catharines in July 2010.  At the time, Mr. Lucciola had professional liability insurance on the basis of a one-year term renewed annually through to 2011.

Mr. Lucciola produced a report and photographs, making no reference whatsoever to any electrical problems.

On August 16, 2010, a contractor was doing work in the attic of the property.  He came into contact with an exposed energized bare copper wire.  He was electrocuted and he died.

Three days later, on August 19, 2010, Mr. Lucciola signed an application for professional liability insurance as he had done every year since 2006.  His insurance application required him to indicate whether or not any claim had been made against him in the last five years, and whether or not he was aware of any situation or circumstance which may result in a claim in the future.  Mr. Lucciola answered “no” to both questions.

The policy was then issued for a further period of one year.

Several days later, Mr. Lucciola was interviewed by an investigator for the Ministry of Labour, at which time he was asked whether or not he had noticed the wire in the attic. He indicated first that he had not noticed it and subsequently that he had but that he had tested it with an electrical tester and received no response from it.  For that reason, he had not made any note of it in his report.

About a year later, the Ministry of Labour conducted an inquest.  Subsequently, Mr. Lucciola signed yet another application for insurance.  It contained the same questions and he answered them in the same way.  Accordingly, a policy was issued for a further one year.

All of these policies contained language to the effect that if the insurer subsequently became aware that if any of these questions had been answered incorrectly, there would be no coverage for any claim or action emanating from a fact or circumstance that the applicant failed to mention in his application.

A lawsuit was subsequently brought against Mr. Lucciola.  He notified his insurer of the claim.  The insurer brought this application for an order that it had no obligation to provide insurance coverage.

The Court had little difficulty concluding that Mr. Lucciola should have known of the potential claim against him when he made his application for the insurance policy that was in effect at the time that he was sued, and should have answered “yes” to that question on his application.  As a result, the Court ruled that the insurer was entitled to deny coverage.

The interesting point in this case has to do with the type of insurance policy that was in place.  Mr. Lucciola’s policy was a “claims-made-and-reported” insurance policy, rather than an occurrence policy.  These are very different.  In a claims-made-and-reported policy, it is the transmittal to the insurer of notice of the claim that invokes coverage.  In an occurrence policy, coverage goes into effect when the incident upon which the claim is based actually takes place.

In this case, the incident (the contractor’s death) took place in August 2010.  The policy in place at that time had been applied for by Mr. Lucciola in 2009.  In 2009, when he answered “no” to the questions as to whether or not he was aware of a possible claim, he was being entirely accurate.  Had his policy been an occurrence policy, the insurer would have had to provide coverage.

In this case, however, the policy in place when coverage was invoked was the policy in effect at the time that Mr. Lucciola notified his insurer of the claim.  In applying for that policy, Mr. Lucciola had answered “no” to questions that should have been answered “yes”.  For that reason alone, Mr. Lucciola was disentitled to coverage.

This is obviously a critical distinction.  If you have professional liability insurance coverage, and you are not aware of the type of policy that protects you, this case is a good lesson on the importance of finding that out and keeping it in mind.

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