Importance of Reporting Disputes and ClaimsPrint this article
By Erinn Collinsworth at Jackson, Collinsworth & Johnson Insurance Agency
Most Professional Liability policies are written on a claims-made and reported basis. For a claim to be covered, several criteria must be met:
• You must have a current policy in force;
• The professional services must have been rendered after the retroactive date in your policy;
• You must report the claim in writing to the insurance company during the policy period (generally within a specified period of time, such as 60 days of first becoming aware of the claim);
• In addition, there should be no prior knowledge of this claim.
Generally, a claim is defined as a demand for damages, money or services arising from a wrongful act. Further, a wrongful act may be understood to be a breach of professional duty, or more simply stated, an actual or alleged negligent act, error or omission. While some insurance policies interpret that the demand can be verbal, other polices clearly state it must be written. Depending on your specific policy, a claim could arise during a phone conversation with a frustrated client or be as obvious as a registered letter demanding money.
In addition to reporting claims, some insurance companies allow, and others require, the reporting of circumstances. A circumstance is when a situation has the potential to turn into a claim – a situation where a reasonable person could expect to receive a future demand for money, services or damages.
Some insurance companies provide free pre-claims assistance to help mitigate the issues surrounding circumstances. A pre-claims assistance provision allows the Professional Liability insurance company to assume expenses on your behalf, including involvement of defense counsel. This provision is not subject to your deductible nor does it reduce the limit of liability. Should the circumstance rise to the definition of a claim, at that point, the Design Professional then becomes responsible for the deductible and the policy limits of liability reduce accordingly.
So, when is a claim a claim? When is the matter a circumstance? When might pre-claims assistance respond?
Florida’s Construction Defect Statute, §558, provides a good sounding board for this discussion as it allows us to address all three scenarios and why your specific policy language matters. Please note we are not discussing the statute itself or compliance with same – simply the receipt of a 558 notice and its trigger effect on the Professional Liability policy.
Consider the case of a Design Professional who receives a 558 notice following the turnover of a newly designed and constructed project. Despite the best of intentions inherent in the statute, as most recipients can attest, the litany of issues and problems related to the completed project may appear not only endless but also determinedly unclear as to the cause of the defect – was it the design, construction, or both?
This vagueness brings us back to our understanding of a claim. Does the notice include a demand for damages, money or services? If it does, the notice is clearly a claim for which the insurance company has a duty to defend. This is especially true as the Professional Liability policy responds to both actual and alleged wrongful acts.
If there is no actual demand but your policy includes a circumstance reporting provision, then the 558 notice should be submitted. As a circumstance, the matter may lay dormant for years and never develop further or, it may, even after a period, accelerate and rekindle as a full-blown claim. In the latter scenario, the insurance company who received and accepted the written notice of circumstance maintains the duty to defend the matter once it has risen to the definition of a claim.
Alternately, the matter may require attention before becoming dormant. Circumstances can easily generate expenses as you attend inspections, respond to subpoenas, provide records and attend depositions. We recommend that a Design Professional never incur any such expenses without legal counsel, so the question becomes, how do we handle and who pays? We again look at the insurance policy. Upon acceptance of a circumstance, if the policy provides for pre-claims assistance, then the insurance company may assist with these expenses.
It is important to note, that not all Professional Liability policies provide pre-claims assistance even while providing for, or more stringently requiring, circumstance reporting. Design Professionals with this type of Professional Liability policy need to be aware that any expenses associated with 558 responses, for example, will be borne as a business expense until the time a claim as defined by the policy is received.
By not reporting the initial “demand”, even for acceptance as a circumstance, there is a risk the claim could be denied for untimely reporting. Additionally, if you experience a policy renewal, with or without a change in insurance company, the prior knowledge issue may arise. This is especially true once you have received written notice. With each renewal, your applications will include a warranty statement regarding no knowledge of unreported claims or circumstances. Was that unreported conversation, letter or email potentially a claim?
On our website, you will find an article by Kent Holland, Esq. entitled When Does a Notice from a Client Become a Claim that Must be Reported to the Insurance Carrier discussing Matkin-Hoover Engineering, Inc. v. Everest National Insurance Company, 2009. Matkin did not submit what Everest considered the Insured’s initial notice of claim. Matkin subsequently brought suit, successfully, to enforce Everest’s duty to defend. While successful, it is certainly the most difficult and least guaranteed manner to provide coverage for a claim.
We understand that not every phone conversation with an angry or frustrated client generates a claim. When in doubt, you should contact your insurance specialist for guidance.