Report Your Claims…PRONTO!

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by Jeff Cavignac, CPCU, RPLU, ARM

My client Bill called me the other day.  “I have good news and bad news,” Bill says.  “The bad news is that I have a client who wanted to make a claim against my professional liability policy for $500,000.  The good news is that I was able to get this resolved for $100,000! I know I have a $25,000 deductible on my professional liability policy, so I’d like to make a claim for the $75,000.”

This is the call insurance brokers don’t like to get.  This is a problem.  Bill clearly violated his responsibilities that are spelled out in the insurance contract and the likelihood of Bill recovering anything is pretty remote.  This underscores the importance of understanding your responsibilities as an insured, specifically when it comes to circumstances which may give rise to a claim or claims in general.

Professional Liability and Other Claims Made Policies:  While timely reporting is important for any insurance policy, it is doubly important for a “claims made” policy.  As the term implies, “claims made” policies only cover claims that are made during the policy period.  You are generally required to complete an application to renew coverage each year and that application will include a question that reads something like this:

“Is Applicant or any individual or entity proposed for coverage aware of any fact, circumstance, situation, act, error or omission which they have reason to believe may or could reasonably be foreseen to give rise to a claim that may fall within the scope of the proposed insurance?”

If you answer “No” to this question and subsequently there is a claim which, in fact, you were aware of, the insurance company can deny the claim.  If you go back to the prior policy term, it would likely be denied there as well since that policy was also written on a claims made policy and the claim was not made in that policy term.  But the insurance company can go farther than that.  They can actually void the policy!  The application is considered a warranty to the policy.  The insurance company could allege that there was material misrepresentation.  If they had known about the matter, they may not have offered terms and therefore, they will sue for rescission of the contract.  If there were other claims pending in the same policy term, you would lose coverage for those claims as well.

The definition of a claim in most Professional Liability policies is “a demand for money or services.”  Contractually, insureds are obligated to promptly notify their insurance company in writing of any claim.  “Promptly” is not defined, however, if the claim is not timely reported, and the fact that it wasn’t jeopardizes the insurance companies’ ability to resolve the claim, you can assume notice wasn’t prompt.

What about those situations that don’t qualify as a claim but conceivably could turn into one?  Fortunately most Professional Liability policies have “Notice Provisions.”  These basically allow insureds to “notice” their insurance company if they become aware of a claim or circumstance which could give rise to a claim.  If the matter subsequently becomes a claim, coverage will apply to the policy that was in force when the matter was originally noticed.

Commercial General Liability and Liability Policies in General That are Written on an Occurrence Basis:  Occurrence-based policies cover “occurrences” which take place in the policy period regardless of when the claim is made.  Loosely defined, “occurrence” is an accident.  If an accident happened in 2015 and a claim was made in 2017, assuming the statute hadn’t run, the policy in force in 2015 would apply.  This, however, doesn’t mean you are not under an obligation to report circumstances or claims.

If you refer to the Commercial General Liability Conditions in the standard ISO CG0001 policy form, you will note that it requires you to make sure the insurance company is “notified as soon as practicable of an “occurrence” or an offense which may result in a claim.”  “If a claim is made or suit is brought against any insured, you must immediately record the specifics of the claim or suit and the date received and notify us as soon as practicable.”  Needless to say, “as soon as practicable” is not defined, however, the same logic as mentioned above will likely prevail.  If your failure to notify your insurance company in a timely fashion affects their ability to resolve the claim, you can assume it was not “as soon as practicable.”

Property Insurance is not much different.  Under the ISO Building and Personal Property Coverage Form, an insured is required to see that the following is done in the event of loss or damage to covered property:

  1. Notify the police if a law may have been broken.
  2. Give us prompt notice of the loss or damage. Include a description of the property involved.

Once again, no surprise, “prompt” is not defined.

Workers Compensation Policies are even stricter!  They require that you “Tell us at once if an injury occurs that may be covered by this policy.”   I’m not even sure how you can notice your insurance company “at once”, but regardless, it sounds more stringent than “as soon as practicable.”  In addition, State Laws impose additional duties on insureds.  For example, in California an employer is required to provide the injured employee with a Form DWC-1 (Employee Claim for Workers Compensation Benefits) within one working day of the notice of injury.  The employer is also required to prepare a form 5020 (Employer’s Report of Occupational Injury or Illness) within 5 days after knowledge of the injury.

Best Practices:  In the event of a claim or a circumstance which may give rise to a claim, you should almost always…ok let’s simplify it….you should ALWAYS notice your broker and your insurance company.  This makes sense on a lot of different levels.  First and foremost, you need to comply with your contractual obligations under your policy.  Failing to timely notify your insurance company can jeopardize your coverage.

It is also well understood that timely reporting of claims results in more effective claims resolutions.  The sooner a loss can be investigated or the sooner an employee can be treated, the lower the net cost of the claim.

Finally, the help your insurance company can provide should not be overlooked.  The likelihood is they have seen this type of claim before and may have ideas on how to resolve it that have not even crossed your mind.  Many Professional Liability insurers take this a step further and offer what is called “Pre-Claims Counseling.”  If you report a circumstance to them that may give rise to a claim, any money they spend to help you resolve it will come out of their pocket and not count toward your deductible or your loss record!  Why would they do this?  Simply because they understand the importance of resolving claims early.

If I wanted to summarize this article in one sentence, it would be this:  If you are aware of a claim or a circumstance which may give rise to a claim, report it to your broker and your insurance company…

*Which is not a defined term, but you know what I mean!