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Principles Governing Coverage Over Time in Medical Liability - International Law Office

International Law Office

Insurance - France

Principles Governing Coverage Over Time in Medical Liability

May 30 2006

Facts
Decision
Comment


The About Act (named after Senator Nicolas About, who was behind the private member's bill that was passed on December 30 2002) introduced a new system for medical malpractice insurance in France.

The About Act rendered 'claims-made' professional indemnity insurance mandatory for medical practitioners. Therefore, an insurer whose policy is in effect on the date on which a claim is first filed against a medical practitioner must, in principle, handle the claim, without being entitled to recover against the medical practitioner's former insurers.

On April 24 2006 the Paris Regional Court issued one of the first judgments setting out the principles governing the application of coverage over time within the meaning of the About Act.

Facts

On August 26 2003 a lawyer acting for a patient who had undergone plastic surgery on February 13 1998 notified the surgeon that the patient was bringing a malpractice claim against him based mainly on the lack of information about the consequences of the operation.

The surgeon forwarded the claim to his insurance broker, who in turn forwarded it to the surgeon's professional indemnity insurer whose policy was in force at the time of the alleged malpractice. The former insurer acknowledged receipt of the claim and opened a file, without taking a stance on coverage. Because of the urgent need to protect the surgeon's interests, the former insurer decided to advance the initial legal costs for the surgeon's defence.

The former insurer's policy was no longer in effect at the time of the claim. The surgeon's professional liability had been covered since January 2002 by another insurance company. By writ of summons dated March 24 2004, the patient brought an action for damages against the surgeon, jointly and severally with another medical practitioner, for compensation of the harm she had allegedly suffered. After reviewing the claim file, the former insurer expressly denied coverage in a letter dated October 7 2004. Relying on the principles established by the About Act, the former insurer invited the broker to redirect the patient's claim to the insurer whose policy was in effect on the date on which the claim was first made.

In disregard of the act, the surgeon brought third-party proceedings against his former insurer. The former insurer issued a third-party notice against the later insurer, seeking indemnity for any award that might be made against the former insurer and a refund of the costs that it had advanced for the surgeon's defence. The later insurer denied coverage, claiming that Article 5 of the act provides for a five-year transitional period during which the contract in force at the time of the cause of loss continues to apply.

Decision

The Paris Regional Court found no malpractice and therefore made no award against the surgeon. However, it had to adjudicate the former insurer's claim for refund of the costs advanced for the surgeon's defence. The court held that, pursuant to Article L251-2, Paragraph 3 of the Insurance Code (as amended by the About Act), the applicable policy is determined by the date on which the claim was first made. The court considered that the first claim was the writ of summons issued on behalf of the patient on March 24 2004 (and not the lawyer's letter dated August 26 2003). Consequently, the applicable policy was that in force on March 24 2004. The court stated that coverage is governed by the provisions of Article L251-2, Paragraph 7 of the Insurance Code (as amended by the About Act), which excludes the operation of Article L121-4 of the Insurance Code (as amended by the Financial Security Act 2003) and prescribes that losses must be covered on a priority basis by the contract in force at the time of the first claim.

The court dismissed the later insurer's argument that the contract in effect at the time of the cause of loss applied during a five-year transitional period. It clearly stated that Article L251-2 of the Insurance Code applies to all contracts concluded or renewed after the About Act entered into force.

The court also refused to recognize that, by advancing the surgeon's initial legal costs for a year, the former insurer had acted as the surgeon's real insurer. The court took the view that advancing these costs was an urgent necessity to protect the surgeon's interests and that the former insurer had merely taken precautionary measures consistent with industry rules on the handling of medical malpractice claims. The court therefore ordered the later insurer to refund the costs incurred by the former insurer for the surgeon's defence.

Comment

The court's judgment reiterated the three main principles established by the About Act.

Validation of 'claims-made' clauses in medical malpractice insurance
The main input of the act was the introduction of a new article into the Insurance Code (Article L251-2). Article L251-2, Paragraph 3, which establishes the principle that liability insurance contracts are triggered on a claims-made basis, reads as follows:

"Every insurance contract entered into pursuant to Article L1142-2 of the Public Health Code shall cover the insured against the financial consequences of losses for which the first claim was made during the validity period of the contract, regardless of when the other constituent elements of the loss occurred, as long as the cause of loss occurred within the context of the insured's activities that were covered at the time of the first claim."

The validation of claims-made clauses under the act rendered obsolete the judicial doctrine that such clauses are without cause.

A liability insurer whose policy was in effect at the time a claim was first made against its insured must now, in principle, handle the claim, unless it is established that the insured knew about - or could have reasonably foreseen - the claim when taking out the policy.

The traditional 'known prior acts' exclusion in medical malpractice insurance, which is construed narrowly by French courts in accordance with the legislature's wishes, is merely an application of the fortuity doctrine.

Retroactive introduction of a five-year discovery period
The act retroactively imposes the principle of a statutory discovery period of no less than five years of the date of expiry of the policy on all contracts effected before the date on which the act entered into force.

This classic tail-coverage clause makes it possible to avoid the consequences of a reduction or modification of the scope of coverage in case of successive contracts. The later insurer (whose contract was in effect at the time of the claim) may cover a risk that is delimited differently from that covered by the former insurer. Certain claims that would have been covered by the former insurer might not be covered (or not to the same extent) by the later insurer, thereby exposing the insured to a risk of gap in coverage.

It was precisely to reduce this risk that the act introduced statutory tail coverage.

Exclusion of the operation of ordinary rules on overlapping insurance
Article L251-2, Paragraph 7 of the Insurance Code excludes the operation of the ordinary rules of law on overlapping insurance by providing for coverage under the contract in effect at the time of the claim first and foremost, thereby reducing the scope of application of former contracts.

Under the ordinary rules of law, insureds with overlapping insurance may, as a rule, direct their claims to the insurer of their choosing.(1) However, where the overlapping insurance is for medical malpractice, the rule is that the contract in effect at the time of the claim applies on a priority basis.

This rule has the following consequences:

  • Only one of the insurance contracts taken out by the beneficiary of the contracts is effective - that is, the contract in effect at the time of the claim;

  • The beneficiary of the contract is no longer entitled to direct its claim against the insurer of its choosing; it may now direct its claim only against the insurer whose contract was in effect at the time of the claim; and

  • The insurer whose contract was in effect at the time of the claim cannot seek contribution from insurers whose contracts were no longer in effect at the time of the claim.

Therefore, Article L251-2, Paragraph 7 of the Insurance Code reduces the scope of application of contracts pre-dating the About Act that could cover claims postdating the About Act. Whether its source is contractual or statutory, the coverage afforded by former contracts will not apply if it overlaps with the coverage afforded by a contract in effect at the time of the claim.

Hence, former contracts will apply on a residual basis where:

  • the activity in respect of which the medical practitioner has incurred liability is no longer covered by the contract in effect at the time of the claim;

  • the claim arises from a cause of loss that was known to the insured before the contract in effect at the time of the claim was effected;

  • the new conditions for coverage under the contract in effect at the time of the claim are not satisfied; or

  • the contract in effect at the time of the claim contains exclusion clauses applying to the claim.

The residual nature of former contracts has also been confirmed by both the French Federation of Insurance Companies(2) and the parliamentarians in charge of drafting the About Act.

Despite its clarity and correct application of the law, the judgment at hand is only a lower court decision. It needs to be supported by similar determinations by other courts of first instance - or upheld on appeal - in order to be regarded as a persuasive precedent.


For further information on this topic please contact Carole Sportes at BOPS (SCP Bouckaert Ormen Passemard Sportes) by telephone (+33 1 70 37 39 00) or by fax (+33 1 70 37 39 01) or by email (carole.sportes@bopslaw.com).


Endnotes

(1) Paragraphs 4 and 5, Article L121-4 of the Insurance Code.

(2) Circular by the French Federation of Insurance Companies, January 13 2003.



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