In advance of next week’s PLUS webinar, Prior Knowledge and Understanding the Circumstance and Claim Reporting Provisions (register here), check out this guest post from Brian F. Satkowski, J.D. from BerkleyConstruction Professional, a Berkley Company. Enjoy the post, and don’t forget to register for the webinar on 11/15.
Prior notice is a critically important tenet of claims-made policies. Misunderstandings between brokers and insureds could potentially result in a tacit waiver of coverage and carriers even justifiably denying the duty to defend a circumstance or claim that should otherwise have been covered.
Because we live in a hyper-litigious society, the duty to defend is one of the most critical aspects of claims-made policies. Defense costs can and often do exceed the amount of judgments or settlements. Accordingly, the need to thoroughly understand the landscape and nuances surrounding the proper and timely reporting of circumstances and claims is vital for ensuring coverage from both the insured and broker’s E&O perspective.
Any person or entity providing professional services should fully investigate professional liability policies containing claims-made provisions. Given the nature of their business, which includes the constant pressure to complete projects on time, on budget, and on scope, makes contractors an ideal class of service professionals for this coverage form. Absent warrantees, professional liability policies protect contractors from being held to a perfection standard, failing to meet the client standards or expectations, and ultimately non-bodily injury or property damage lawsuits. This includes the provision of mental tasks, ie. value engineering, standalone scheduling assistance, planning, budgeting, or other strategic visionary consultative services.
Under such circumstances, the timely and accurate reporting of these incidents by either the contractor or broker to the carrier is of the utmost importance. It cannot be emphasized enough that the failure to comply can result in the denial of coverage.
The duty of care owed by the contractor to their broker varies among states nationwide. Some states elevate a broker’s duty of care beyond the basic procurement of coverage or apply a fiduciary duty on brokers. Others impose additional duties upon the broker. Some look beyond the contract and apply a standard of fairness and reasonableness, while a number of states impose professional liability on brokers only under special circumstances, such as foreseeable reliance. Regardless of the standard applied, the fact remains that brokers are valued as skilled experts in the field of insurance and can be held liable if they are apprised of a claim or circumstance that they fail to report to the carrier.
The Reporting of Potential Claims
Depending on the policy and carrier, claims-made professional liability policies are typically written to provide the mechanics for reporting a potential claim or circumstance. In such instances, contractors should be very careful to follow the exact conditions demanded by the policy. Certain policies demand the specific name of potential plaintiffs, estimated damages, and timeline of events. Failure to abide by any of these stipulations could negate coverage. Challenges could also arise from a new carrier, which can deny claims on the basis of prior knowledge, the lack of coverage on the prior policy, and/or the failure to properly report circumstances.
Under a claims-made policy, the coverage is triggered when a claim is both made and reported during the applicable policy period or optional extended reporting period, irrespective of when the alleged conduct occurred. Most courts construe this as a basic condition precedent to coverage. Many jurisdictions have held that, if the reporting requirement is not satisfied pursuant to the terms and conditions of the policy, coverage is not triggered and the insurer has no obligation to defend, let alone pay.
Another caveat of many courts includes the application of strict standards pertaining to reporting requirements. Claims-made policies allow for greater certainty in the risk-underwriting process. This is because carriers should know of potential exposures at the end of the policy period since claims made or reported after the policy expiration would not fall within the policy’s scope of coverage. The predictability of the claims-made model then benefits the insured by way of lower premiums.
In addition, courts, which have adopted the strict adherence to the reporting requirements of claims-made policies, held that, as a matter of public policy, if an insured reported a claim after the policy period, it would be akin to extending coverage to the insured for free. This would amount to benefits that were not included in the original policy and/or an unjustified extension of coverage.
Consider the instance where an insured reports a claim within a reasonable amount of time, but fails to report it during the applicable policy period. In jurisdictions adopting a strict adherence to notice reporting, the carrier could justifiably deny coverage. This would also be the case even if the insured renewed coverage with the same carrier the following year. The foregoing should serve as a paradigmatic example and cautionary tale to insureds and brokers alike.
While many jurisdictions strictly construe notice requirements and will uphold a denial of coverage based on untimely notice, other jurisdictions have adopted “notice-prejudice rules.” Under these guidelines an insurer would then be permitted to deny coverage only if it can demonstrate that it was prejudiced by the insured’s untimely reporting of a circumstance or claim.
While the law regarding notice varies from one jurisdiction to the next, generally, the onus of providing notice falls squarely on either the contractor or broker. Should a contractor learn of a circumstance or claim and not apprise their broker of same, then the obligation to notify the carrier and preserve their policy rights falls squarely on the contractor. The same criteria applies to brokers alerted to claims by the insured.
Timely Claims Reporting
Many insureds and brokers alike often ask “What constitutes the timely reporting of claims?” In short, timeliness in many instances rests on “prior knowledge.” Most claims-made policies bar coverage for claims made against an insured when it is proven that the insured knew of or reasonably should have known that, prior to the policy period, a future claim might be brought against them.
So, what constitutes prior knowledge? If the contractor knows of or reasonably should have known that a claim would be brought against them for services rendered, then they have satisfied the knowledge component. Further, if the contractor possessed this knowledge prior to the effective date of the policy, then they have satisfied the prior component. Under such conditions, a specific individual at the insured level should be made responsible for the reporting of claims or circumstances.
As a result, the general rule for insureds and brokers is simple. Carriers should be contacted as soon as the contractor becomes aware of a circumstance that may result in a claim. While this timeframe is expressly set forth in the professional liability policy, the importance of timely reporting cannot be overemphasized. The failure to do so, pursuant to the relevant policy terms and conditions, can result in a legally-justifiable denial of coverage. E&O issues can also occur if the broker fails to put the carrier on notice on the contractor’s behalf.
Legally-justifiable Denial of Coverage
A legally-justifiable denial of coverage by a carrier means that the contractor is then responsible for funding their own defense and paying any resultant judgment or settlement without insurer reimbursement. It also negates the insurer’s active role and expertise in litigation. Additionally, and perhaps most importantly, because most carriers will defend an insured even if the allegations against it are groundless or false, the contractor will then be stripped of protections from frivolous lawsuits or claims.
The duty to defend is one of the most critical aspects of claims-made policies. This is extremely important since most states do not recognize a common law or statutory duty to defend. Defense costs can and often do exceed the amount of a judgment or settlement. Accordingly, barring a provision in the policy, an insurer has no obligation to assume the defense of its insured or to reimburse its insured for incurred defense costs. As such, understanding the landscape and nuances of how to properly and timely report circumstances and claims, so as to avoid a denial of coverage, is of the utmost importance from a coverage, broker and E&O perspective.
The Importance of Immediate Claims Reporting
In determining the duties under an insurance policy, it is important to consider the contractual relationship between contractors, insurers, and brokers. An insurance policy is a bilateral binding agreement granting the insured various rights and protections afforded under the policy. Among these rights is the decision not to report a claim and absorb the financial consequences. However, this is a determination that should never be taken lightly and only after consulting a broker about all the possible ramifications.
As soon as a contractor learns of a potential circumstance or claim, the firm should immediately put their insurer on notice directly or, alternatively through their broker. The idea that carriers penalize insureds for reporting circumstances or claims is not only incorrect, but logically inconsistent with the bilateral nature of an insurance policy. While the insurer has a justifiable interest in wanting and needing to know what exposures exist prior to the end of the applicable policy period, their interest in protecting and preserving client interests and rights under the policy is perhaps one of the greatest allies any contractor can have when exposures problems arise. Otherwise, why buy professional liability coverage?
Brian F. Satkowski, J.D. is an Assistant Vice President at BerkleyConstruction Professional, a Berkley Company. W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States. Email Brian