MADISON, Wis. (CN) - The industry standard in legal-malpractice-insurance policies could face extinction in Wisconsin after a state Supreme Court hearing Wednesday.
Wisconsin Lawyers Mutual Insurance Co. began offering claims-made coverage in the 1980s as an alternative to the original type of legal-malpractice insurance, which covered an insured for any "occurrence" that falls within the coverage period.
High costs associated with the original option made it less common, and those that did offer it charged too much.
The newer model covers occurrences only when the claims are made and reported to the insurer within the coverage period
Now the industry standard across the country, the plan faces extinction as Melissa and Kenneth Anderson seek to enforce a judgment against their former attorney Thomas Aul.
Aul retained an attorney when he received a settlement demand from the Andersons in December 2009, but he did not report it to WILMIC until March 9, 2011 - nearly a year after the end of the period for his claims-made, court records show.
WILMIC says this failure to report invalidates the claims-made insurance contract.
Claude Covelli, arguing for insurer before the Wisconsin Supreme Court, pointed out that the very nature of claims-made policies is that they cover a narrower scope of claims, which is why they are more affordable.
"The insured didn't pay a premium for that coverage," Covelli said at the Wednesday hearing.
Covelli said the claims-made requirements were printed several times throughout the policy documents, and that WILMIC specifically asked Aul about unreported claims during the April 2010 renewal process. He reported none, Covelli said.
Jeffrey Davis, an attorney for the Andersons, told the court that the statutes governing these policies prohibit invalidating a claim based only on a lack of timely notice, in the absence of prejudice.
WILMIC had the opportunity to prove prejudice before the trial and appeals court, but did not, he said.
Indeed, the appeals court found no evidence that WILMIC was harmed in its ability to defend Aul in the lawsuit.
"WILMIC makes no argument that its ability to investigate, evaluate and defend this claim was impaired by Aul's late notice," the appeals court ruling states.
"WILMIC learned of the claim almost a year before the lawsuit was filed and learned of the lawsuit within weeks of its filing," the ruling continues.
Covelli countered before the Supreme Court on Wednesday that requiring WILMIC to pay for an occurrence that its policy did not cover is in itself an injury.
"I can't think of anything more prejudicial to an insurance company," the insurer's attorney said.
It could drive insurance premiums up if the Wisconsin Supreme Court affirms the appellate court's judgment for the Anderson, Davis conceded, but the attorney said he did not think it would eliminate claims-made insurance policies by removing reporting requirements as grounds for invalidation.
Justice Annette Ziegler challenged this assertion, asking Davis how a company can "survive" if the timely reporting element is taken away.
Davis responded that the claim being made would be the covered event, and while timely reporting could still be required, failure to do so could only invalidate coverage if it injured the insurer.
Covelli closed with a focus on prejudice, saying that a ruling for the Andersons would render claims-made insurance illegal statewide, setting Wisconsin apart from the rest of the country.
"There's a reason it's the standard in the industry," Covelli said. "It works. It's good. It doesn't create any problems."