Hasbrouck v. St. Paul Fire and Marine Ins. Co., 93-140

• Decision Date: 22 December 1993
• Docket Number: No. 93-140,93-140
• Parties: Mae M. HASBROUCK and Richard L. Hasbrouck, Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Appellee, and Narong Jarasviroj, M.D., P.C., A Professional Corporation; and Narong Jarasviroj, An Individual, Defendants.
• Court: Iowa Supreme Court

Page 364

511 N.W.2d 364

Mae M. HASBROUCK and Richard L. Hasbrouck, Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Appellee and Narong Jarasviroj, M.D., P.C., A Professional Corporation; and Narong Jarasviroj, An Individual, Defendants.

No. 93-140.

Supreme Court of Iowa.

Dec. 22, 1993.

Marc A. Humphrey and James R. McCreight, Humphrey & Haas, P.C., Des Moines, for appellants.

Roy M. Irish and Robin L. Hermann, Patterson, Lorentzen, Duffield, Timmons, Irish, Becker & Ordway, Des Moines, for appellee.

Considered by HARRIS, P.J., and LAVORATO, NEUMAN, SNELL, and ANDREASEN, JJ.

LAVORATO, Justice.

A patient and her spouse brought this declaratory judgment action against her treating physician, his professional corporation, and his insurance company. The purpose of the suit was to determine coverage under a "claims made" policy for the doctor's alleged negligence in treating the patient. The policy covered all claims first made during the policy period and required the insured to report such claims to the insurer within such period. The patient and her spouse sued the doctor on the patient's tort claim within the policy period, but the doctor failed to report the suit to his insurer until after the policy had lapsed. In sustaining the insurer's summary judgment motion, the district court ruled that notice of the suit to the doctor was not notice to his insurance company within the meaning of the policy. Based on this ruling, the district court determined there was no coverage for the patient's tort claim against the doctor and dismissed the declaratory judgment action. We affirm.

I. Background Facts and Proceedings.

The facts are undisputed. St. Paul Fire and Marine Insurance Company issued a medical liability insurance policy to Narong Jarasviroj, M.D., P.C., and Narong Jarasviroj in his individual capacity. Coverage under this "claims-made" policy began September 23, 1985, the retroactive date under the policy. The policy was written upon a six-month basis and was renewed semiannually until September 23, 1990.

Around October 3, 1990, St. Paul mailed Jarasviroj a standard notice of cancellation for nonpayment of premium. The notice stated that (1) the premium payment on the policy was past due, and (2) the policy would be canceled October 23, (3) unless the company received the premium by that date. Jarasviroj made no premium payment.

On November 15, 1990, St. Paul sent Jarasviroj a letter at his home. The letter informed him that his policy had expired on October 23. The letter went on to say:

This is a "claims-made" form of coverage. This means that you will not have coverage for claims arising out of acts performed prior to the termination date for which a claim may be made after the termination date, unless you purchase reporting endorsement coverage.

Within 30 days of the termination date of your policy, you may purchase at additional cost a Reporting Endorsement as provided in the terms of your policy. This endorsement extends the time in which a claim may be made for acts which occurred before the termination date.

Jarasviroj received the letter but did not accept the offer to purchase.

On August 31, 1990--a month before the policy expired--a former patient of Jarasviroj, Mae M. Hasbrouck, filed a medical malpractice action against him. The petition alleged that Jarasviroj was negligent in performing a colonoscopy procedure on her some two years earlier. Hasbrouck's husband joined in her suit.

Jarasviroj did not report the lawsuit to St. Paul. Instead, he hired an attorney to represent him. The attorney filed an answer on September 10. On December 6--after the policy had expired--the attorney wrote St. Paul a letter informing it of the suit and seeking coverage for the Hasbroucks' claims.

Several weeks later, in a letter to the attorney, St. Paul denied coverage and a duty to defend, giving these reasons:

In order to trigger coverage under the above said policy, there are two points that must be followed:

1. To be covered, the professional service must be performed (or should have been performed) after your retro date (9-23-85).

2. The claim must also first be made while this agreement is in effect. The policy goes on to say that: "A claim is made on the date you first report an incident or an injury to us or our agent."

The doctor failed to report the claim to us or our agent while his policy was in effect.

A year later the Hasbroucks brought the present declaratory judgment action against St. Paul, Jarasviroj's professional corporation, and Jarasviroj personally. The lawsuit seeks a ruling as to whether St. Paul has a duty to defend and indemnify the professional corporation and Jarasviroj against the Hasbroucks' medical malpractice suit against Jarasviroj.

After the declaratory judgment action was filed, both sides filed motions for summary judgment. Jarasviroj joined in and supported the Hasbroucks' motion.

The district court overruled the Hasbroucks' motion and sustained St. Paul's motion, concluding there was no coverage. In the same ruling, the district court dismissed the Hasbroucks' petition.

The Hasbroucks appealed.

II. Standard of Review.

Our review is for errors at law. See Iowa R.App.P. 4. On appeal of a summary judgment ruling, we must decide (1) whether a genuine issue of material fact exists, and (2) if the law was correctly applied. No fact question exists if the only dispute concerns the legal consequences flowing from undisputed facts. In such circumstances summary judgment is proper. Ottumwa Hous. Auth. v. State Farm Fire & Cas. Co., 495 N.W.2d 723, 726 (Iowa 1993). Here the facts are undisputed. Our only task is to interpret the policy. Interpretation is a legal question unless the interpretation depends on extrinsic evidence. Grinnell Mut. Reins. Co. v. Voeltz, 431 N.W.2d 783, 785 (Iowa 1988). Here there is no extrinsic evidence; only the terms of the policy are involved. So summary judgment is appropriate.

III. Coverage.

As they did in the district court, the Hasbroucks contend that notice of a claim to the insured--as opposed to the insurer--is enough to trigger coverage under a "claims made" policy. Because they sued Jarasviroj while the policy was in effect, the Hasbroucks think this was enough to trigger coverage for their claims. At the very least, the Hasbroucks say--as they said in the district court--the policy is ambiguous as to the reporting requirement and for that reason the language should be interpreted in their favor. For reasons that follow we reject both contentions.

A. "Claims made" policy versus "occurrence policy." Today insurance companies offer two types of policies in the professional liability field: the "claims made" (or "discovery") policy and the "occurrence" policy. Note, The "Claims Made" Dilemma in Professional Liability Insurance, 22 U.C.L.A.L.Rev. 925, 925 (1975). Our analysis requires an understanding of the differences between the two.

The "claims made" policy provides coverage for any errors, including those made before the effective date of the policy, as long as a claim is made within the policy period. Id. at 925-26. In contrast, the "occurrence" policy provides coverage for any acts or omissions that arise during the policy period, regardless of when claims are made. Id. at 926.

According to one writer, at one time the insurance industry offered professional liability coverage only on an "occurrence" basis. This was so because most familiar policies like automobile and general liability were written on this basis. Allegedly unprofitable results with professional liability "occurrence" coverage led to the birth and growth of "claims made" policies in the professional liability field. Id.

There are advantages and disadvantages to both the insured and insurer involving the "claims made" policy and the "occurrence" policy. As to the "claims made" policy, the obvious benefit to the underwriter is that there is no open-ended "tail" after the expiration date of the policy. The benefit stems from the fact that

[a]n underwriter who is secure in the fact that claims will not arise under the subject policy long after its termination or expiration can underwrite a risk and compute premiums with greater certainty. The insurer can establish his reserves without having to consider the possibilities of inflation beyond the policy period, upward-spiralling jury awards, or later changes in the definition and application of negligence.

Id. at 928.

In contrast, the "occurrence" policy has a "tail" that extends beyond the policy period. The "tail" is the lapse of time between the date of the incident giving rise to liability and the time when a claim is made. This results in less certainty in computing premiums. For example, insurers writing "occurrence" professional liability policies must compute premiums at current rates even though claims may become highly inflated long after the premiums cease to be paid. So the premiums the insurer receives may end up being inadequate against future claims that may be inflated. Id. at 928-29.

"Claims made" policies, however, also have disadvantages for the insurer. For example, such policies cover acts performed before the effective date of the policy. "Occurrence" policies in contrast provide coverage only for acts occurring during the policy period. The difference has been illustrated this way:

If a policyholder has practiced his profession for 39 years and obtains insurance for his fortieth year under an "occurrence" policy, his insurer's exposure is limited to year 40 only; whereas, if it were a "claims made" policy written in the fortieth year, it could cover any malpractice back to year one.

Id. at 929.

From an insured's standpoint, the "claims made" policy offers two special advantages: coverage for acts prior to the effective date of the policy and lower premiums. The "occurrence" policy provides no such coverage and, because of the uncertainty, costs more. Id.

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