Is a Signature Needed to Make a Purchase Order a Written Contract? When Do You Report D&O Claims? Does Extended Reporting Period Affect Duty to Report D&O Claims? You Test-Drive a Car, Somebody’s Insurance Must Cover You, Right?
By Jerry Trupin, CPCU
Is a Signature Needed to Make a Purchase Order a Written Contract?
The blanket or automatic additional insured endorsement may save work for insurance companies, but it’s become an attorney’s full-employment bonanza. To avoid possible collusion between owners and contractors, the endorsement includes a requirement that there be a written contract between the parties calling for additional insured status to trigger coverage. The result has been a torrent of lawsuits over the meaning of the requirement. The latest deals with whether a purchase order must be signed to constitute a written contract as called for by the endorsement.
On October 11, 2012, Newmark Associates (a large NYC real estate management firm) sent a purchase order to Kras Interior Contracting Corp. to do some work at a building Newmark managed for 41 West 34th Street, LLC. The purchase order read, “This Purchase Order And Agreement Is A Legal Agreement Between Contractor (i.e., Kras) And Newmark…As Agent For Owner…By Accepting the Order, Vendor Hereby Agrees to Become Bound by the Terms of this Agreement.”
On November 12, 2012, a Kras employee was injured on the job and eventually sued the owner. Zurich (Newmark’s insurer) sought additional insured coverage for Newmark and the building owner from Endurance (Kras’s insurer). When Endurance refused, Zurich sued Endurance.
Endurance argued that the purchase order was not a written contract because it was not signed. The court sided with Zurich.[i] It pointed out that in another case that had ruled that an unsigned contract was unenforceable, the policy required that the contract be “executed.” Executed was held to mean that it had to be signed.[ii]
The CGL policy coverage grant for contractual liability does require the contract be executed:
- “Assumed in a contract or agreement that is an insured contract, provided the bodily injury or property damage occurs subsequent to the execution (emphasis added) of the contract or agreement.” ISO form CG 00 01 04 13
- But that requirement doesn’t appear in the automatic additional insured endorsement. In the case of additional insured coverage, ISO apparently just wanted to rule out oral contracts. Perhaps ISO agrees with what the late movie mogul Sam Goldwyn is reputed to have said: “Oral contracts aren’t worth the paper they’re written on.”
When Do You Report D&O Claims?
When should notice of a claim be given to the insurance company on a claims-made policy? The self- evident answer would seem to be: when the claim is first made, but that begs the question. The real question is, what is a claim?
Edward M. Weaver was President and Chief Executive Officer of Multivend, LLC, a now-defunct vending machine sales company in Deer Park, NY, from 2004 until 2010. During that time, D&O coverage was provided to Weaver and Multivend by Axis Insurance.
On September 27, 2012, Weaver’s attorney advised Axis that Weaver had received a letter from the US Department of Justice identifying him as a target of a federal grand jury investigation in the Southern District of Florida with respect to possible criminal violations including mail fraud, wire fraud, and conspiracy in connection with his activities at Multivend.
On October 2, 2012 a criminal indictment was filed in the US District Court for the Southern District of Florida, charging Weaver, Multivend, and others with conspiracy, mail fraud and wire fraud. The Indictment alleged that Weaver, Multivend and others made numerous false statements to prospective customers including:
- “Customers who purchased the business opportunity would earn substantial profits.”
- “Customers would earn back their investment in one year or less.”
- “Customers could earn $800 per day.”
The Indictment also alleged that Weaver, et al.:
- Concealed the fact that Vendstar had received numerous complaints from previous customers about the lack of profitability of the business,
- Sales representatives, with management’s knowledge and approval, routinely removed the disclosure page that advised the prospect to speak to an attorney and get other professional advice before purchasing the business opportunity.
On December 11, 2012, Axis denied coverage stating that the indictment was not a claim first made during the policy period. That’s a basic requirement for coverage under a claims-made policy. Axis argued that the 2012 claim arose from the same wrongful acts as a 2007 claim.
Axis noted that in November 2007, Multivend had received a letter from the Maryland Attorney General demanding non-monetary relief and advising of an administrative proceeding against Multivend. The 2007 letter was sent to Multivend by the Securities Division contending that Multivend may be selling business opportunities in violation of the disclosure and antifraud provisions of the Maryland Business Opportunities Sales Act, not providing the disclosure statement as required by the Act, and making unlawful earnings representations about the business opportunity. The Division requested certain “information and materials” so that it “may determine the extent of [Multivend’s] compliance with the Maryland Business Opportunity Act.” The Maryland AG Letter notified Multivend that “failure to respond may result in more formal legal action by the Division.”
Axis asserted that the 2007 Maryland AG letter demanding non-monetary relief and advising of an administrative proceeding against Multivend constituted a demand or other proceeding against Multivend, and was therefore a claim that should have been reported to Axis. Failure to give notice of claim in 2007 barred coverage for that claim.[iii] Axis further contended that the 2012 indictment was based on the same wrongful acts as the 2007 Maryland AG Letter and was also not covered for that reason. The court agreed with AXIS and granted it summary judgment, in effect saying that Multivend had no case. [iv]
It’s clear that Mutivend violated the first three rules of insurance claims handling: Report, report, report. The problem I see is that most insureds, upon receiving a letter from a government agency indicating that they may be targets of an investigation, would reach out to their attorney and not their insurance broker.[v]
PRACTICE POINT: The definition of a claim in claims-made policies differs greatly from occurrence based policies. What’s worse, there’s no standard wording. Review the wording in your clients’ D&O policies. Tell your clients that a government agency letter requesting information and advising of consequences for not complying may constitute “a demand” for purposes of a claims-made D&O policy, thus triggering a duty to notify the insurer. Let them know that you’d like to be brought into the discussion whenever government agencies notify them of an investigation or possible indictment.
How Does Extended Reporting Period Affect Duty to Report D&O Claim?
Another claims-made quandary: New York DFS rules require that claims-made policies include a 60-day extended reporting period (also known as tail coverage) when the policy is not renewed.[vi] How does that affect the duty to report a claim?
An employee of New York Institute of Technology (“NYIT”) sued NYIT for defamation on February 26, 2009, and NYIT received notice of the action on August 6, 2009. NYIT’s claims?made policy expired on September 1, 2009. NYIT notified its insurer, National Union, on September 15, 2009.
The policy included the following provisions:
The insured shall, as a condition precedent to the obligations of the insurer under this policy, give written notice to the (insurer) of any Claim made against the insured as soon as practicable and either:
- Any time during the Policy Year or during the (extended reporting period, if applicable); or
- within 30 days after the end of the Policy Year or the extended reporting period, if applicable, as long as such claim is reported no later than 30 days after the date such claim is first made against the insured.
NYIT argued that it had 60 days following the end of the policy to report a claim first made during the policy period. This extended reporting period was mandated by NY Insurance Department regulation #121 that stated: “Upon termination of coverage (of a claims-made policy) a 60-day automatic extended reporting period…must be provided by the insurer.”[vii]
National Union contended that the automatic ERP only applied to claims that were both first made in the 60 days following expiration and reported during that period.
The judge ruled that a 60-day ERP Endorsement requiring that both the claim made against the insured and the insured’s report to the insurer take place within the 60-day extended reporting period was unenforceable. She held that National Union wanted to impose a requirement for ERP not specified by the applicable NY insurance regulations.[viii] National Union has filed a notice of appeal. Stay tuned.
PRACTICE POINTER: This case once again shows the value of having declinations of coverage reviewed by experienced counsel. Don’t just accept the insurer’s declination.
When You Test-Drive a Car, Someone’s Insurance Must Cover, Right?
On his insurancecommentary.com blog this week, former Big I Virtual University “dean” Bill Wilson bemoans the fate of insureds with non-standard personal auto coverage.[ix] Tim Dodge, the IIANY coverage guru, picked up on it in his posting.[x] When two such insurance mavens smell smoke, you can bet there’s fire.
The cause of their consternation was non-standard drive-other-car coverage that some insurers provide. Here’s the language:
(This policy) does not cover a non-owned car while being used or maintained in any auto business by anyone.
At first glance, it doesn’t seem serious. After all, ISO PAPs excludes coverage for insureds:
while employed or otherwise engaged in the business of…selling…repairing…servicing…storing…or parking vehicles designed for use mainly on public highways.
Sounds similar, but let’s look at what happens when Sally GoodClient totals a new BMW she’s test-driving. An ISO PAP covers the claim. Sally is not engaged in the auto business; the exclusion applies only to someone employed or engaged in auto-related business. It precludes coverage for the dealer, but not for Sally.
However, if Sally has a policy with the non-standard wording shown above, she loses coverage. The non-standard exclusion is triggered by the use of the car in any auto business by anyone. Clearly the car is being used in the auto business. Result: Sally has no coverage and you have a headache.
Think any of your insureds ever test drive cars? Take two aspirin and call your E&O insurer in the morning.
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[i] Zurich Am. Ins. Co. v Endurance Am. Speciality Ins. Co., 2016 NY Slip Op 08313 [145 AD3d 502] Appellate Division, First Department, December 8, 2016
[ii] Cusumano v Extell Rock, LLC (86 AD3d 448 [1st Dept 2011])
[iii] New York’s law that required an insurer to show that it was prejudiced by late notice had not yet been enacted.
[iv] EDWARD M. WEAVER, Plaintiff, v. AXIS SURPLUS INSURANCE COMPANY, US District Court, E.D.NY No. 13-CV-7374 (SJF)(ARL). 10/30/14
[v] The court noted that neither party raised a choice of law issue and both relied upon New York law to support their respective positions. Therefore, the Court stated that it relied upon New York law. My non-lawyer opinion is that insurers generally prefer New York law. Despite New York’s liberal reputation, its courts are quite strict in enforcing insurance contract terms. It took an act of the legislature to get New York courts in line with the great majority of states on the issue of requiring the insurer to show it was prejudiced to deny liability coverage based on late notice. Arguments could be made to apply Maryland or Florida law. I don’t know if Multivend’s attorneys explored that question.
[vi] Most insurers offer an optional longer period for an additional premium.
[vii] http://www.elany.org/contentHTML/1181.htm
[viii] New York Inst. of Tech. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2017 N.Y. Slip Op. 30345(U) (Sup. Ct. N.Y. Cty.) Feb. 23, 2017
[ix] Bill Wilson, Is There Auto Coverage for Dealer Loaner Autos, Rental Cars, and Test Driving Vehicles? Is There Auto Coverage for Dealer Loaner Autos, Rental Cars, and Test Driving Vehicles? Property & Casualty Insurance Commentary. https://insurancecommentary.com/is-there-auto-coverage-for-dealer-loaner-autos-rental-cars-and-test-driving-vehicles/
[x] Tim Dodge, Think All Policies Are the Same? http://www.iiabny.org/AskTim/default.aspx
