One of the most important aspects of a claims-made liability policy is the duty to promptly report problems to your insurance carrier.
But when does that duty kick in? When does a problem become a “reasonably foreseeable” claim that should be reported?
A recent opinion from Indiana offers some guidance: if your client’s case has been dismissed because of something you did or didn’t do, you need to pick up the phone. Immediately. If you delay, you run the risk of having your carrier deny the claim for late reporting.
When in Doubt, Report
A lawyer in Indiana learned this lesson the hard way. Here are the facts, as reported by Professional Liability Matters:
“[A]n attorney submitted discovery responses on behalf of his client, but the adversary claimed that the responses contained false statements and moved for dismissal. When counsel did not respond to the motion for dismissal, the case was dismissed.
The attorney’s professional liability policy was renewed on a yearly basis. The attorney signed a renewal application after the underlying lawsuit had been dismissed. The policy included an exclusion for claims that relate to facts that the insured reasonably should anticipate would be the basis of a claim. The insured attorney, however, did not identify the dismissal of the underlying action as an event that could trigger a liability claim.
The following year, the attorney’s former client filed a legal malpractice claim based on the dismissal of the underlying civil lawsuit. The attorney notified his insurer of the complaint, but coverage was denied on the grounds that the attorney failed to give notice of the dismissal when he renewed his policy.”
On appeal, the court said the notice requirement was a limitation on the insurer’s policy obligations. If the insured fails to give prompt and proper notice, the insurer has no duty to defend and indemnify.
In this case, the attorney should have known that the dismissal of his client’s case could lead to a malpractice claim.
As a result – and because he did not report the problem – he is facing personal responsibility for the mistake.
The policy provisions in the Indiana case are pretty much standard for claims-made coverage.
Here are the definitions in Lawyers Mutual’s policy:
- Claims-Made Policy. A policy providing liability coverage only if a written claim is made during the policy period or any applicable extended reporting period. For example, a claim made in the current year could be charged against the current policy even if the loss occurred many years in the past.
- Claim. A claim is the notification of an incident made to the insurance company and a demand for benefits as provided by the policy. With a claims-made policy, a claim must be reported to the carrier as soon as you know of the claim and during the time your policy is in effect. Unless this is done, the claim may not be covered.
- Claim / Incident Notification. Notification is the opportunity for an insured to report any potential claims or incidents which may result in a claim during the policy period. Reporting of all potential claims is crucial to the claims-made policy and all insureds are asked to disclose incidents as soon as they are aware of them.
Nobody likes making a mistake. It may be tempting to deny it happened and hope nobody finds out. Tempting, but dumb. Failure to notify your carrier could result in loss of coverage.
And that will only make a bad situation worse.
- Professional Liability Matters http://professionalliabilitymatters.com/2015/10/27/coverage-denied-for-failing-to-report/
- Lawyers Mutual Liability Insurance Company of North Carolina http://www.lawyersmutualnc.com/malpractice-terms
Jay Reeves a/k/a The Risk Man practiced law in North Carolina and South Carolina. He is a former Legal Editor at Lawyers Weekly and Risk Manager at Lawyers Mutual. Contact him at firstname.lastname@example.org.