Traps for the Unwary: Reporting Claims Under Liability Insurance Policies

Companies reporting liability insurance claims need to be aware that the pertinent rules vary depending on whether a policy is “claims made and reported” or “occurrence.”

Most, if not all, Directors and Officers and Errors and Omissions policies are written on a claims-made and reported basis. By contrast, Commercial General Insurance, or CGL insurance, is written on an occurrence basis. Under a claims made and reported policy, a claim must have arisen and been reported during the same policy period. By contrast, under an occurrence policy, the claim may be reported long after the expiration of the policy that gives rise to coverage.

The most common mishap in the claims made and reported area is the failure to recognize a communication as constituting a “claim”. While a “claim” may often be thought of as being synonymous with a lawsuit, many claims made and reported policies define “claim” to include “a demand for monetary or non-monetary relief.”

Thus, a demand letter that seeks recovery of damages, or which proposes a settlement, may well be a “claim” that is required to be reported. Similarly, a request for a tolling agreement may also qualify as claim. Suffice it to say that there are numerous court decisions denying coverage to insureds under a claims made and reported policy because notice was not timely given as a result of a failure to recognize that the insured was in fact in receipt of a “claim.”

The reporting rules under claims made and reported policies are unforgiving. Strict compliance is required and the asserted lack of any prejudice suffered by an insurer, arising from non-complaint notice, is irrelevant. At a minimum, a claim must be reported during the policy period or before the expiration of any extended reporting period. Further, in some cases, the policy may require more expedited notice – such as giving notice within a certain number of days after the claim first came to the attention of the company.

In either case, courts have generally declined to excuse an insured’s failure to strictly comply with those reporting requirements. This means that the failure to recognize certain communications as constituting a “claim”, and to give timely notice thereof, can be fatal to coverage.

Companies should also be aware of the opportunity to give “notice of circumstances” where communications threaten, but do not yet constitute, a “claim.” In other words, notice of circumstances is given when the company is aware of facts that may reasonably be anticipated to result in a claim at a later stage.

Suppose, for example, that a company terminates an employee who orally threatens to bring a discrimination lawsuit. While the oral threat is not a “claim”, it certainly puts the company on notice that a claim may be made in the future. By giving notice of circumstances, the company ensures that if and when the claim actually arises, it will fall into the policy year during which the notice was given. By doing so, the company preserves coverage for the claim if and when it later arises.

Consider what happens if, in the foregoing example, the company failed to give notice of the circumstances. Assuming no claim arose in the current policy year, the company would go to renewal. Although the company certifies in its renewal application that it was not aware of any acts or events that would result in a claim, the employee files a discrimination claim during the next policy year.

As the company had knowledge at the time of renewal of the likelihood of a claim, the insurance company will deny coverage based on the misstatement in the application. Notably, all of this could have been avoided had the company given notice of the circumstances when the employee made the litigation threat.

The reporting rules for occurrence policies are more forgiving. Generally, occurrence policies require only that notice be given “as soon as practicable”. But even where an insured gives late notice coverage is not necessarily lost. This is because occurrence policies are governed by the notice-prejudice rule, which enables an insurance company to disclaim coverage based on late notice only on a showing of substantial prejudice.

From the insured’s perspective, giving notice sooner rather than later is advantageous because pre-notice defense fees and expenses will not be covered under the policy. Moreover, the later notice is given the greater the chance that the insurance company can meet its burden to show prejudice.

The bottom line is that the reporting requirements under liability policies can often be super technical. As the failure to meet those requirements can sometimes have catastrophic results, companies would be well advised to carefully scrutinize policy language and if appropriate hire an insurance professional.