“Claims made” policy and cancellation: OHIC INS. CO. V. HAJ-HAMED (COA 11/16/2007)


DATE RENDERED: 11/16/2007

This appeal involves a dispute over the cancellation of a "claims made" medical professional liability policy with OHIC Ins. Co.  Riverside was owned by Haj-Hamed and had multiple urgent medical care and professional medical offices in Northern Kentucky and Ohio.  The policy included Kentucky endorsements which addressed both cancellation and nonrenewal of the policy.  OHIC notified the insureds in writing that the policy would be canceled, effective September 6, for nonpayment of premium unless $19,461 was “received in OHIC’s office” prior to that date.  A payment of $16,642 (less than the amount required) was made prior to September 6. 

On September 27, based on the media coverage of Haj-Hamed’s arrest and the criminal allegations against him, OHIC’s underwriting department notified the insureds that their coverage would be canceled on December 11, 2002, due to the “[d]iscovery of willful or reckless acts” by the insured.

Several malpractice claims were filed during this interim. One was for an incident that occurred prior to Sept. 6, but no claim filed until after Dec. 11.  The remaining claims were for incidents after Dec. 11.

At trial, the jury found that OHIC, by and through its employees, had failed to comply with its duty “to exercise ordinary care in issuing and canceling insurance policies” and
that such failure “was a substantial factor in causing damages” to Haj-Hamed and Hamed and that OHIC had failed to comply with its statutory and administrative duties regarding the issuance or cancellation of an insurance policy.  The jury awarded $175,000 to Haj-Hamed, reduced to $157,500 based on a finding of 10% fault. The court denied OHIC’s motion for judgment notwithstanding the verdict or for a new trial. This appeal and cross-appeal followed. 

COA rejected OHIC’s first assertion that the trial court erred by failing to apply Ohio substantive law rather than Kentucky law.  The modern test is “which state has the most significant relationship to the transaction and the parties.” Restatement of Conflict of Laws 2d, sec. 188 (1971). Using this test, in most cases the law of the residence of the named insured will determine the scope of his automobile liability insurance policy.

The trial court did not err by determining that Kentucky had the most significant relationship to the transactions and parties, and by applying Kentucky rather than Ohio substantive law.  Pursuant to KRS 304.20-320(2)(b) and 806 KAR 20.010, as well as the policy’s terms, OHIC was obligated to provide written notice of any  cancellation of insurance. The notice was required to be mailed or delivered at least fourteen (14) days prior to the effective date of the cancellation if the cancellation is for nonpayment of premium[, . . . or] at least seventy-five (75) days prior to the effective date of the cancellation if the policy has been in effect more than sixty (60) days."

After the COA concluded the trial court properly applied Kentucky law, the COA then held the trial court erred by failing to direct a verdict in OHIC’s that the insured’s were properly notified of the cancellation and that there would be no coverage after Dec. 11 (75 days after the notice).  Even if an ambiguity existed as to whether the policy was canceled at an earlier date due to the nonpayment of premium, the policy clearly was clearly canceled no later than December 11.

The COA then set aside the jury’s award of $60,000 for defense of the malpractice action since this was a "claims made" policy and thus only applied to those claims which were filed by December 11, 2002.  As the malpractice action was not filed until January 2003, it necessarily fell outside of the policy’s term of coverage and the claim for costs associated with the defense of that action should not have been submitted to the jury. 

As to the $85,000 awarded for defense of the medical licensure board proceedings, OHIC correctly notes that any award to Haj-Hamed of more than $25,000 was excessive in light of the insurance policy’s specific limitation of coverage for “Formal Charges or Disciplinary Proceedings” to “$25,000 per named individual.”   On  remand, therefore, another $60,000 of the award must be set aside.

As to the award of $30,000 as damages for the additional costs incurred in order to purchase replacement liability insurance after the OHIC policy was canceled, COA agreed with OHIC that the trial court erred by submitting the issue to the jury as the record is undisputed that the insurance policy was a “claims made” policy which covered only those claims made before the policy’s expiration on December 11, 2002. As the alleged malpractice occurred in October 2002, but the resulting claim was not filed until January 2003, the insureds clearly were not entitled to coverage of the claim under the policy’s terms. Absent proof of an obligation to pay the claim, the trial court properly granted a directed verdict for OHIC.

Digested by Michael Stevens

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