Esmailzadeh v. Johnson and Speakman

• Decision Date: 10 March 1989
• Docket Number: No. 88-5263,88-5263
• Citation: 869 F.2d 422
• Parties: Karim ESMAILZADEH and Ruthann J. Esmailzadeh, Appellants, Central Properties, Michael Bower and Homes By Desire, Inc., v. JOHNSON AND SPEAKMAN, New York Insurance Exchange, Inc., Kansa-Brougher Syndicate, Brougher Syndicate, Inc. and Pacific Employers Insurance Company, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 422

869 F.2d 422

Karim ESMAILZADEH and Ruthann J. Esmailzadeh, Appellants Central Properties, Michael Bower and Homes By Desire, Inc., v. JOHNSON AND SPEAKMAN New York Insurance Exchange, Inc., Kansa-Brougher Syndicate Brougher Syndicate, Inc. and Pacific Employers Insurance Company, Appellees.

No. 88-5263.

United States Court of Appeals Eighth Circuit.

Submitted Feb. 9, 1989.

Decided March 10, 1989.

Jeff David Bagniefski, Rochester, Minn., for appellants.

David L. Hashmall, Deborah B. Hilke, John J. McGirl, Jr., and Dean K. Johnson, Minneapolis, Minn., for appellees.

Before ARNOLD, BOWMAN, and MAGILL, Circuit Judges.

ARNOLD, Circuit Judge.

This diversity case involves professional-liability insurance policies purchased from separate carriers by a law firm that was sued for malpractice by appellants Karim and Ruthann Esmailzadeh. The policies each covered malpractice "claims first made and reported" during a certain period. The District Court ¹ held that the Esmailzadehs could not recover in a garnishment action against the insurers, because their malpractice claim was made, but not reported, during one policy period and reported, but not made, during another. We affirm.

I.

From January 1 to December 31, 1985, the law firm of Johnson and Speakman had claims-made professional-liability insurance coverage through appellee Pacific Employers Insurance Company (Pacific). In November 1985 the Esmailzadehs mailed a summons and complaint to the law firm, asserting that the firm failed to protect the Esmailzadehs' interest in Anoka County, Minnesota property. Speakman received this complaint, but refused to acknowledge service in accordance with Minnesota Rule of Civil Procedure 4.05. The service was thus ineffective. The law firm did not notify Pacific at this time.

The firm later purchased a claims-made policy through appellee New York Insurance Exchange, Inc. (Exchange), effective for one year beginning February 7, 1986. The firm did not disclose the fact that the Esmailzadehs had attempted to serve a complaint against it. Coverage was underwritten by appellees Brougher Syndicate, Inc. and Kansa-Brougher Syndicate (Syndicates). On the day the Syndicates' coverage began, the Esmailzadehs effected personal service of their malpractice complaint against the firm.

In July or August 1986 the firm notified Pacific and the Syndicates of the Esmailzadehs' claim. Pacific denied coverage because the claim was not reported within its policy period. The Syndicates refused to provide coverage on the ground that the claim was not first made within the period of their policies, and because the firm had not disclosed the claim on the application for insurance.

The Esmailzadehs settled their claim against the firm, obtaining a judgment in Anoka County District Court. The firm also assigned to the Esmailzadehs all of its claims against the insurance companies. The Esmailzadehs served the insurance companies and the Exchange with garnishment summonses and moved the state court to allow amendment of the complaint to add the new parties. See Minn.Stat.Ann. Sec. 571.51 (West 1988) (if probable cause shown to believe garnishee is liable, court should permit supplemental complaint). The insurance companies then removed the case to the District Court.

Adopting the magistrate's ² recommendation, the District Court rejected the Esmailzadehs' attempt to hold Pacific liable under the rule that a delay in the giving of notice by the insured does not excuse an insurer from providing coverage in the absence of actual prejudice. See Reliance Ins. Co. v. St. Paul Ins. Co., 307 Minn. 338, 343, 239 N.W.2d 922, 925 (1976). Noting that Reliance involved an "occurrence" policy, the Court held that the rule requiring prejudice should not be applied to "claims made and reported" policies like the one the law firm purchased from Pacific. The Court further concluded that claims-made policies are not against the public policy of Minnesota. Nor were the Syndicates liable under their policies, the Court held, because the malpractice claim was first made when Speakman received the summons and complaint by mail in November 1985--before the Syndicates' policies took effect. Finally, the Court found that the Exchange simply had acted as an agent for disclosed principals in the transaction, and was thus not liable on the contracts for insurance. Accordingly, the Esmailzadehs' motion to file a supplemental complaint was denied. This appeal followed.

II.

Turning first to the District Court's refusal to apply Reliance to the claims-made policy issued by Pacific, we note that this Court ordinarily gives great weight to a local district court's interpretations of state law, see Barber-Greene Co. v. National City Bank of Minneapolis, 816 F.2d 1267, 1270 (8th Cir.1987). We conclude that the distinction between "occurrence" policies and "claims-made" policies drawn by the District Court in this case is a sound one, amply supported by persuasive authorities. Claims-made policies (sometimes called "discovery" policies) are those under which coverage is provided if the error or omission is discovered and brought to the insurer's attention during the term of the policy. 7A J. Appleman, Insurance Law & Practice Sec. 4504.01, at 312-13 (Berdal ed. 1979 & Supp.1988). Under an occurrence policy, coverage is provided if the negligent act or omission occurred within the term of the policy, even if the term has since expired. Id.

Because the reporting requirement helps to define the scope of coverage under a claims-made policy, several courts have held that excusing a delay in notice beyond the policy period would alter a basic term of the insurance contract. See, e.g., City of Harrisburg v. International Surplus Lines Ins. Co., 596 F.Supp. 954, 960-62 (M.D.Pa.1984) (notice provision in...