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Under Missouri law, if there is no timely notice to an insurer under a "claims made" professional liability insurance policy, there is no coverage, according to the 8th U.S. Circuit Court of Appeals.

Lexington Insurance Co. issued a professional malpractice liability policy to St. Louis University for claims made during the period July 1, 1990, through July 1, 1991. The policy covered losses that exceeded $2 million. A policy endorsement required claims made in writing against the policyholder during the policy period. The policy also stated that it was a "claims made" policy. On May 20, 1991, Shelly McCormick sued the university for medical malpractice allegedly committed in 1979. The university mistakenly listed Ms. McCormick's claim as a 1979 rather than a 1991 claim on "loss run" reports submitted to Lexington before the policy expired. The insurer denied coverage based on no timely notice. The university sued but lost in the trial court.

The appellate court said that under a "claims made" policy, coverage is provided if the third party's claim is made against the policyholder and brought to the insurer's attention during the term of the policy. The court said the 1991 loss run, a 15-page document reporting more than 500 incidents, did not constitute notice to the insurer of Ms. McCormick's claim. The trial court decision was affirmed.

Lexington Insurance. Co. vs. St. Louis University, 8th U.S. Circuit Court of Appeals, July 8, 1996 (BI/03/J.-$10).

Fraud sufficient for property denial

A property insurer was not required to prove reliance to prevail on its claim that a policyholder submitted a fraudulent proof-of-loss, according to the 8th U.S. Circuit Court of Appeals.

Roy Holst filed a $215,000 claim against his insurer, General Casualty Insurance Cos., after his place of business was damaged by a fire. The insurer paid $70,000 on the portions of Mr. Holst's claim that were not in dispute at that time. Later, the insurer denied the claim completely because it believed Mr. Holst failed to cooperate in the investigation of the loss and violated the concealment, misrepresentation or fraud conditions of the insurance policy. The insurer then filed this action to recover the $70,000 it paid Mr. Holst. The insurer had reason to believe arson may have been the cause of the fire. A jury found for the insurer.

On appeal, Mr. Holst argued that the insurer failed to prove that it relied on Mr. Holst's allegedly fraudulent statements. The insurer argued that it only had to prove that Mr. Holst breached a provision of the insurance contract. The court said this case involved a fraudulent proof-of-loss charge rather than a charge of fraud in an application for insurance coverage. According to the court, a fraudulent proof-of-loss does not require proof of reliance as would be the case in a claim of fraud in the inducement to write a policy. The trial court decision was affirmed.

General Cas. Insurance. Companies vs. Holst Radiator Co., 8th U.S. Circuit Court of Appeals, July 10, 1996 (BI/01/F.-$10)

Psychic trauma covered in comp case

The Supreme Court of Georgia ruled that psychic trauma is compensable when it arose out of an accident in which a compensable physical injury contributes to the continuation of the psychic trauma.

While in the scope of his employment as a truck driver, Denver George suffered physical injuries when his tractor-trailer hit a passenger vehicle broadside after the other driver ran a stop sign. The driver of the other vehicle was thrown from the impact, and a female passenger was killed instantly. Mr. George saw her body collide with the grill of his truck. He was placed in the same emergency room with the other driver whose lung had collapsed, whose face was mangled and who was hollering for the deceased passenger.

Two months later, Mr. George was released to return to full duty work by his orthopedist. He continued to be treated by a psychiatrist for post-traumatic stress disorder, which intensified his knee injury. His condition necessitated continuing psychiatric treatment and resulted in his inability to work as a truck driver. Mr. George applied for and was denied compensation for the psychiatric disability. The Court of Appeals reversed and awarded him benefits.

The state Supreme Court said a psychological injury or disability is compensable if it arises naturally and unavoidably from some discernible physical occurrence. The court noted that Mr. George had suffered a discernible physical injury. Thus, the court said Mr. George was entitled to benefits for mental disability and psychiatric treatment which, while not necessarily precipitated by a physical injury, arose out of an accident in which a compensable physical injury was sustained, and that injury contributed to the continuation of the psychic trauma.

Southwire Co. vs. George, Supreme Court of Georgia, June 3, 1996. (BI/02/F.-$10)

OK to limit benefits to nonresident aliens

Nonresident alien parents of a deceased employee could not challenge a state law limiting compensation benefits to them, according to the Supreme Court of Illinois.

Abundia Jarabe McLeod was killed while working as a baggage handler for American Airlines in Illinois. Her parents, Cesar Jarabe, Sr., and Tomasa Isma Jarabe, were nonresident aliens residing in the Philippines. The parents had never resided in the United States. Illinois workers compensation law awarded benefits to dependent parents equal to two-thirds the average weekly wages of a deceased worker unless the parents were nonresident aliens in which case the benefits were reduced to 50% of the average weekly wage. Initially, the parents here were awarded $297.50 per week in death benefits; however, this was reduced pursuant to the nonresident alien formula. The parents challenged the nonresident alien provision as unconstitutional because it violated the due process and equal protection clauses of the U.S. and Illinois constitutions. The trial court agreed.

On appeal, the Industrial Commission argued that the parents could not challenge the law because nonresident aliens cannot avail themselves of these state and federal constitutional protections. The court agreed stating that the protection of the fourteenth amendment is territorial and applies only to those persons within the territorial jurisdiction of the United States. Thus, the court said that the parents, as aliens who have never resided in the U.S., could not invoke the equal protection or due process clause of either the federal or the state constitution in an effort to invalidate the law. The trial court decision was reversed.

Jarabe vs. Industrial Commission, Supreme Court of Illinois, March 28, 1996, Rehearing Denied June 3, 1996 (BI/04/F.- $10).

These abstracts were prepared by Mayo H. Stiegler. Copies of these decisions are available by sending a $10 check payable to Mayo H. Stiegler, to Business Insurance, 740 N. Rush St., Chicago, Ill. 60611-2590. List the number for each opinion.