Court Decision Extended to Impact Insurance Contracts with Multiple-Year Rate Guarantees

A recent decision to award Childrens Hospital Los Angeles $3.6 million in a dispute with its insurer may make the industry more wary of signing multiple year contracts for professional liability insurance, according to Drew Pomerance, a partner of Los Angeles based Roxborough Pomerance & Nye LLP, who represented the hospital.

The decision was reached by a panel of three private arbitrators on Oct. 14, 2003 after Childrens Hospital filed a lawsuit against its insurer, San Francisco based Norcal Mutual Insurance Company, for breach of contract.

Norcal Mutual had entered into a series of contracts with three-year rate guarantees starting in 1994. However, after its last agreement in 2000, the insurer denied to continue the hospital’s professional liability coverage in 2001. Pomerance argued that it was impossible for the insurer to guarantee rates for three years unless it was obligated to renew coverage each year.

The panel agreed, stating that Norcal contractually committed itself to issue annual policies to the hospital and was required to renew the policy for each successive year within each of the agreed upon three year terms. The panel found that when Norcal notified the Childrens Hospital in July 2001 of its intent not to renew the policy for the following year, it breached its contract with the hospital.

“Insurers shouldn’t be able to arbitrarily deny renewal coverage after they have entered into a rate guarantee agreement,” added Pomerance. “The $3.6 million awarded to Childrens Hospital—which covers the additional amount it had to pay to secure new insurance from another provider—can now go towards critically needed research and medical care for sick children.”