Court: Insurers Must Be Even Clearer In Explaining Retroactive Dates In Group
Medical Malpractice Policies
Seth J. Chandler
schandler@uh.edu
August 29, 2004
Many physicians currently have protection from lawsuits under what are called
“claims made” liability insurance policies. These policies, unlike “occurrence” based
policies, protect the insured only against “claims” made during the period of the policy or
a usually brief extended reporting/discovery period thereafter. Thus, a doctor who obtains
a pure claims made policy for some period of time and who fails to obtain supplemental
“tail coverage” through another claims made policy or another insurance instrument may
find herself unprotected when, as frequently occurs, she allegedly commits malpractice
during the policy period, but is not sued about it until quite some time afterwards. In
addition, many claims made policies do not cover the insured for all claims made even
during the effective period of the policy, but only those in which the underlying
occurrence took place after a “retroactive date.” The absence of “tail coverage” coupled
with retroactive dates narrows the scope of coverage under many claims made policies –
a fact that has long troubled some courts.
The recently decided case of President v. Jenkins, 180 N.J. 550, 853 A.2d 247
(2004), is yet another unleashing of judicial creativity in the efforts to reform claims
made policy. The case likely forces insurers in New Jersey and elsewhere to reform their
policy forms and sales practices to physicians in ways that hammer home, even more
forcibly than before, the limitations of claims made policies. It has particular relevance to
the frequent occasions on which physicians purchase medical malpractice insurance
through membership in a “group” that serves primarily as a conduit for such sales. The
case is a striking example of the willingness of some courts to reshape liability insurance
policies in order to maximize the potential for compensation to victims of medical
malpractice.
The facts of President are stunning because they would appear to the untrained
eye to be one of the strongest possible cases for not reshaping an insurance policy. An
obstetrician insured (Jenkins) let his prior occurrence based liability insurance policy
lapse in October 1997 because of his failure to pay premiums. On January 8, 1998,
having been previously notified of the developing problems with his earlier occurrence
policy, and a few days after allegedly committing medical malpractice against the
President family by failing to diagnose eclampsia1, he sought out new liability insurance
coverage. He did so by approaching an insurance agency that worked with the Garden
State Physician’s Alliance (“the physician group”), which in turn had a group policy with
Zurich Insurance Company, a large insurer. Zurich did not issue medical malpractice
insurance directly to physicians but rather added physicians as additional insureds to its
master policy for calendar year 1999 with the physician group. The obstetrician filled out
an application in which he (a) said that his professional liability insurance had never been
“denied, cancelled, or not renewed2”; and (b) signed his name right under the following
1
The failure to diagnose allegedly resulted in a baby with brain damage, partial paralysis and a
seizure disorder.
2
Although this statement may not technically have been a lie in that the formal letter from the
occurrence insurer canceling retroactive to October 26, 1997, did not arrive until the next day, January 9,
1998, there is no evidence in the President opinion that the insured ever corrected what, after January 9,
statement “I understand that the coverage offered is provided by a claims-made policy
and that incidents that occurred prior to the prior acts or retroactive date are not covered
and claims reported after the expiration date are not covered unless I purchase or
otherwise obtain an extended reporting endorsement by Zurich.” (emphasis by court).
Subsequent events reinforced on Dr. Jenkins the importance of the retroactive
date. To finance the premiums for the new policy, Dr. Jenkins filled out forms that
confirmed that the effective date of the new policy would be February 1, 1998. Dr.
Jenkins promptly received temporary insurance (via a “binder”) that identified February
1, 1998, to April 1, 1998, as the binder period and February 1, 1998, as the “retroactive
date.” Dr. Jenkins received a certificate of insurance that set February 1, 1998, as the
effective date and January 1, 1999, as the expiration date. And Dr. Jenkins received an
endorsement to the master policy that listed him as an additional insured and that
specified a retroactive date of February 1, 1998. The master policy (accurately) set forth
its own effective date as January 1, 1998. Finally, in April 1998, Dr. Jenkins received a
copy of the full policy which stated on its cover page, “We will pay on behalf of a
physician, damages that the physician shall become legally obligated to pay because of a
claim first made during the policy period arising out of a medical incident which
1998, appears to have been a material false statement. See Stipich v. Metropolitan Life Ins. Co., 277 U.S.
311, 317 (1928) (“If, while the company deliberates, [the insured] discovers facts which make portions of
his application no longer true, the most elementary spirit of fair dealing would seem to require him to make
a full disclosure.”). The New Jersey Supreme Court case makes no reference to any claim of fraud or
misrepresentation made by the insurer against the insured, though this may simply be because the issues
were not addressed in the summary judgment under review.
occurred on or after the retroactive date and which is reported to us during the policy
period.” (emphasis by court).
The victims of the malpractice brought suit in September 1999, and Dr. Jenkins
sought protection as an additional insured under the Zurich policy. Dr. Jenkins also sued
the insurance agency on the alternative theory that, if there were no coverage, it was the
result of the agent’s failure to procure it on his behalf. Citing the retroactive date
provision, Zurich sought summary judgment. And arguing that the insured had (falsely)
told them that his old coverage expired on February 1, 1998, thus obviating the need for
any pre-existing coverage, the insurance agency sought summary judgment too. The trial
court granted both motions for summary judgment and the intermediate appellate court
affirmed, over a dissent. On appeal, the New Jersey Supreme Court upheld summary
judgment in favor of the insurance agency but reversed and remanded with respect to the
claim against Zurich. The court found the insurance policy “ambiguous” and potentially
contrary to the insured’s “reasonable expectations.”
The court’s finding of ambiguity rested primarily on its description of a conflict
between the retroactive date of the master policy for claims against the physician group
itself and the retroactive date applicable to claims against physicians added as additional
insureds. Cf. Rusthoven v. Commercial Standard Insurance Co., 387 N.W.2d 642 (Minn.
1986) (noting that ambiguity can be created by two crystal clear provisions in a policy,
each of which contradicts the other). The former was January 1, 1997, while the latter
depended on when a particular physician was added to the policy.3 The court also noted
that the binder was ambiguous “because the retroactive date was set after the policy’s
effective date; thus it provided no retroactive coverage at all.”4 As a prelude to these
findings, the court discussed with enthusiasm its earlier holding in the controversial case
of Sparks v. St. Paul Ins. Co., 100 N.J. 325, 495 A.2d 406 (1985). There, it had criticized
claims made policies with minimal retroactive periods as not offering an adequate “quid
pro quo” for the limitations placed on “tail claims” created by claims made policies.5
3
There is no evidence that Dr. Jenkins ever read the policy’s provisions regarding the group
retroactive date (or anything else). The case is thus typical of many in insurance law in which the ambiguity
said to justify the court in reshaping the policy is discovered only by lawyers after the fact. Ambiguity
doctrine thus may be thought of in part as a doctrine that prophylactically improves insurance policy clarity
(a) for the few individuals brave enough to read them ahead of a dispute and (b) for courts who have to
struggle with them afterwards.
4
How this lack of coverage makes the policy “ambiguous” is unclear. It may make the policy
“unfair”, it may even render the policy contrary to the reasonable expectations of the insured, but hitherto
the issue of oppression has generally been thought distinct from the issue of ambiguity. See Celestino v.
Mid-American Indemnity Co., 883 S.W.2d 310 (1994) (policy that covers absolutely nothing is not
ambiguous, but it may well be unconscionable).
5
The case is controversial not only because of its evident hostility towards widely used claims
made policies but also because the alleged flaw with the policy – a retroactive date that coincided with the
inception of the policy – actually had no factual relationship to the failure of the insurer to pay. As the court
realized, 495 A.2d 416 n.5, even if the policy had been retroactive back to the beginning of time, there
would have been no coverage under the policy: the insurer didn’t pay because the policy lapsed (for nonpayment of premiums) before the claim was ever made. So offensive was an irrelevant provision of the
Having found ambiguity, the court then reversed summary judgment by holding that the
insured had presented adequate evidence that his “reasonable expectation” was that the
policy did not contain the sort of limiting retroactive date actually contained in the
language of the policy.6
The President opinion could be analyzed in a conventional fashion. It may also be
read, however, merely as a symptom of judicial discomfort with a medical system in
which acquisition of medical malpractice insurance is optional. Thus, the compensation
received by patients that suffer devastating injuries can rest on the often inadequate assets
of their medical injurer. This latter reading is inspired by the willingness of the court to
embrace a result favoring coverage here without careful consideration of contrary
arguments about the proper functioning of a private and optional insurance market. The
hostility towards retroactive dates continued from the earlier Sparks decision ignores, for
example, the utility of such provisions in preventing the sort of market-destroying
adverse selection that plagues private, optional insurance markets. Without such
provisions, physicians who know they have potential claims against them can simply
contract, however, that the court refused to honor a presumably inoffensive and crystal clear relevant
provision of the contract. Insertion of a short retroactive period was thus treated more like a tort.
6
In a separate segment of the opinion, the court found that the insurance agent could not be liable
because the agent believed – based on the insured’s representations – that “any additional retroactive
coverage (any coverage prior to February 1, 1998) would have been superfluous. The New Jersey court
thus appears to be holding either that an insured can have a reasonable expectation of superfluous coverage
or that this insured is not estopped from asserting any reasonable expectation of coverage by virtue of
having made false representations about the need therefore to his insurance agent.
stock up on claims made policies once they suspect such a claim to be imminent. To be
sure, such adverse selection can theoretically be prevented by expensive investigatory
underwriting or reliance on the law of fraud and misrepresentation, but the standards
erected by courts to prove fraud and misrepresentation are often sufficiently high as to
make exclusive reliance on that body of law somewhat impractical.
The court now adds to its hostility towards claims made policies, a new hostility
towards group policies. Such policies are widely used in medical malpractice and other
fields in part because of their ability to reduce transaction and marketing costs. Of course
there are multiple retroactive dates in a group liability insurance policy. The whole point
is that the group is continuous while additional insureds come and go. The insurer cannot
shorten retroactive periods for the group every time a new physician joins the group. And
it cannot extend retroactive periods for each physician back to the beginning of the group
without risking severe adverse selection problems. How an insured could have a
“reasonable expectation” to the contrary is something not explained by the President
court. And, while conceivably the insurer could have made this point clearer to this
insured through additional use of bold type or yet more definitions, it is doubtful that
these complexities would actually have enlightened many insureds. Bolding every
limitation in an insurance policy accomplishes little. But cf. Ponder v. Blue Cross of
Southern California, 145 Cal. App. 3d 709, 193 Cal. Rptr. 632 (1983) (wanting health
insurer to place all provisions limiting coverage in conspicuous type and to define fully in
the contract itself “temporomandibular joint syndrome”). Thus, while the court’s hostility
is literally confined to the failure of the insurer adequately to clarify its multiple
retroactive dates, the difficulty of accomplishing that task with greater precision than
already was done, impels speculation as to whether the hostility is actually directed
toward the inevitable complexity of master contracts themselves.
In the end, however, no matter how much some academic theorists may criticize
New Jersey jurisprudence in this area, it remains the law for New Jersey and a potential
precedent for other jurisdictions confronting similar issues.7 If they are to forego
discontinuing group medical malpractice policies that often advantage insurers and
physicians alike, medical malpractice insurers are now going to have to undertake
painstaking steps to ensure that future insureds cannot claim “ambiguity” in avoiding
retroactive dates. The result will at first likely be longer contracts and a more complex
contracting process that few physicians will enjoy. The next case, therefore, is likely to
be a direct confrontation between an insurance industry that seems set on widespread use
of claims made policies with retroactive dates and segments of a judiciary hostile to the
limited coverage such policies provide.
7
Other courts may, of course, refuse to follow President v. Jenkins as a “distinct minority view,”
just as they have refused to follow the Sparks case.