Claims Made Policies are Very Different from Occurrence Policies

Claims Made Policies are Very Different from Occurrence Policies

Insured Who Settled Suit Without Insurer’s Consent Lost Indemnity Coverage

Benecard Services, Inc. is a company that manages prescription drug benefit plans. In 2015, it was sued by its onetime business partner, another company that sponsors such plans under Medicare Part D. The lawsuit included claims for breach of contract and fraudulent misrepresentation. In 2016, the lawsuit settled. In Benecard Services, Inc. v. Allied World Specialty Insurance Company, f/k/a Darwin National Assurance Company; Atlantic Specialty Insurance Company; Rsui Indemnity Company; Travelers Property Casualty Company Of America; Ace Property & Casualty Insurance Company, Allied World Assurance Company (US) Inc v. Benecard Services, Inc., Nos. 20-2359, 20-2360, United States Court of Appeals, Third Circuit (September 8, 2021) it sought  coverage for its defense and settlement costs under various business insurance policies it held. Denials of coverage, and then litigation, followed. In 2020, the District Court granted summary judgment to the insurers in both cases composing this litigation-one case involving Benecard’s directors and officers liability and general liability policies, and another involving its errors and omissions liability policy.


Benecard challenged the District Court’s grant of summary judgment to its errors and omissions insurer, Allied World Specialty Insurance Company. Allied World paid Benecard’s defense costs to the tune of $3.8 million, but declined to indemnify any portion of the settlement because Benecard settled the underlying lawsuit against it without obtaining Allied World’s prior written consent – an express condition of coverage under the policy’s consent clause.

The trial Court merely pointed to the policy’s plain language, which links exhaustion to “payment” by the insurer-rather than accrual by the insured-of defense costs. The Court then referred to the undisputed facts and concluded that Benecard did not exhaust its coverage limit. That conclusion is amply supported by Benecard’s express admission that Allied World paid defense counsel only $3.8 million – rather than its limits of $5 million.

Benecard then tried to claim that New Jersey’s appreciable prejudice doctrine applies to its claims made policies. The trial court disagreed and noted that the appreciable prejudice doctrine only applied to “occurrence” policies.  The Third Circuit agreed that the doctrine has no application whatsoever to a “claims made” policy that fulfills the reasonable expectations of the insured with respect to the scope of coverage. That is because “claims made” policies are generally held by knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers. Benecard’s errors and omissions policy is a “claims made” policy.

The consent clause is a clear term of Benecard’s claims made policy. Accordingly, Allied World need not show appreciable prejudice to enforce it.

Benecard also argued that Allied World operated with less than candor and engaged in “gotcha” claims handling, because it knew Benecard was considering (and then actively negotiating) settlement, yet it failed to remind Benecard of the E&O Policy’s Consent Clause when it was a clear and unambiguous condition of the policy. Although Allied World was informed that settlement negotiations were a possibility just five to six weeks before the settlement was consummated. There was no evidence that Allied World led Benecard to believe the consent clause had been satisfied.

Benecard also failed to show that the District Court erred in granting summary judgment to Allied World in the errors and omissions action. The operative policy’s consent clause states that “[n]o coverage is available under this Policy for . . . any settlements or settlement offers made[] without [Allied World’s] prior written consent.” It is undisputed that Benecard failed to obtain that consent. Accordingly, the District Court correctly concluded that Allied World is not required to indemnify the settlement.

Benecard next challenged the District Court’s grant of summary judgment to Allied World in the action involving its directors and officers liability policy. There, the Court held that Benecard’s claim fell within that policy’s “Third Party” and “Professional Services” exclusions. The Third Circuit concluded that coverage exclusions in insurance policies are presumptively valid and are enforced if they are specific, plain, clear, prominent, and not contrary to public policy. The exclusions at issue meet this standard. The “Third Party” exclusion unambiguously barred coverage for claims involving, among other things, “alleged . . . misleading statement[s] or breach[es] of duty in connection with the rendering of . . . services to a third party.” The “Professional Services” exclusion likewise unambiguously bars coverage “relating to the rendering [of] or failure to render any professional services.” These exclusions sweep broadly and overlap to some degree, with one another and with a third exclusion Benecard mentions.  But there is nothing unclear or uncertain about their language.

Benecard argues that enforcing the exclusions as written renders coverage illusory, and that the policy should instead be interpreted to honor Benecard’s objectively reasonable expectations. Coverage was not illusory because the exclusions leave intact the policy’s coverage for breaches of duty by company executives acting in their executive capacity-the typical domain of directors and officers liability insurance. The exclusions were, therefore, enforceable as written.

Benecard also challenged the District Court’s grant of summary judgment to another of its directors and officers liability insurers, Atlantic Specialty Insurance Company. The Court concluded that Benecard’s policy with Atlantic Specialty provided no coverage for the underlying lawsuit against Benecard, because that suit falls within the policy’s exclusion for “Managed Care Activities.” The District Court correctly concluded that the exclusion “unambiguously” bars coverage for Benecard’s claim.

Benecard next challenged the District Court’s summary judgment for Travelers Property Casualty Company of America, again in the directors and officers action. New Jersey law provides that if the terms of an insurance policy are clear, courts should interpret the policy as written and did so affirming the denial by Travelers.

Lastly, Benecard argued that the District Court erred in ruling that it could not maintain bad faith claims against the insurers absent a finding of coverage. Under New Jersey law, a claimant who could not have established as a matter of law a right to summary judgment on the substantive coverage claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.

Likewise for bad faith claims premised on alleged processing delays, the test is essentially the same. Such bad faith claims are viable only when the substantive claim for coverage is “valid” and “uncontested.” Here, however, Benecard could not establish a right to coverage. Additionally, Benecard’s citation to the New Jersey Unfair Claim Settlement Practices Act were unavailing, because that statute does not create a private right of action.


Insurance protects the insureds against many risks of loss – not every possible loss. It is the duty of the insured to prove that the loss was due to a peril insured against and that it fulfilled the terms and conditions of the policy. One of those conditions required that the insurer consent to any settlement. Since Benecard effected a settlement without requesting the consent of the insurer, it breached the contract condition and was not entitled to any benefits. Its other claims of coverage against three different insurers were not viable and it must now use its own funds to pay the settlement. It is imperative that every insured read, understand and apply the terms and conditions of the policy and act fairly and in good faith in its dealings with its insurers. Failure to do so in this case was very expensive to Benecard.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at and Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at;  Follow Mr. Zalma on Twitter at; Go to Barry Zalma videos at ; Go to Barry Zalma on YouTube-; Go to the Insurance Claims Library –  The last two issues of ZIFL are available at  podcast now available at


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