When Is a Claim a Claim?

Written by Instant E&O

An errors and omissions liability insurance policy is quite explicit about notification of claims or incidents that might give rise to a claim. The instanteando.comTM policy states the following:

Claim means a written demand received by the Insured for money, services, equitable relief or a request to toll or waive any applicable statute of limitations; provided, however, claim does not include any investigation, proceeding or prosecution initiated by any governmental, administrative, regulatory or prosecutorial authority.

and

Reporting Requirements and Cooperation

  1. If the Insured becomes aware of a claim, the Insured must:

(1) advise the Company immediately in writing, giving the Company all details including the specific act or omission; the injury or damage which has or may result from such act or omission; the circumstances by which the Insured first became aware of the act or omission; and, the names, addresses and telephone numbers of all persons who may have knowledge or relevant information;

(2) preserve all documents and other evidence relating to the claim;

(3) send the Company documents relating to the claim when requested;

(4) cooperate with the Company and defense counsel in the investigation, defense and settlement of a claim and enforcement of contribution or indemnification actions against others;

(5) attend hearings, depositions, and trials if requested; and

(6) not admit liability, make any offer of settlement or payments, incur any expense; or assume any obligation arising out of or in any way connected with a claim without the Company’s prior written consent.

b. If, during the policy period, the Insured becomes aware of an act or omission in the performance ofprofessional services that reasonably may be expected to give rise to a claim, and if, during the policy period, the Insured reports to the Company in writing: (1) such specific act or omission and the identity of each person and entity responsible for such act or omission; (2) the date on which such act or omission took place; (3) the injury which has or may result from such act or omission and the identity of each person and entity subject to such injury; and (4) and the circumstances by which the Insured first became aware of such act or omission; then, any claim subsequently made arising out of such specific act or omission shall be deemed to be a claim made during the policy period.

Let’s analyze this. What truly constitutes a claim or more importantly, an incident that might give rise to a claim? Obviously, a writ or summons or suit papers which name the you, your company or an employee alleging negligence, is a claim and should be notified immediately to your insurer.

No list can be all-inclusive, but the following may be considered grounds for notifying your insurer that something may arise from a situation:

  • A fee dispute – not all fee disputes result in a counter-claim for negligence, but many do. Consequently, if you choose to litigate, make sure your files are absolutely perfect and that you are completely confident in the work.
  • A telephone call from a client alleging negligence and threatening litigation. Don’t wait for it in writing. Where there’s smoke, there’s fire.
  • A client files for bankruptcy or is suffering long-term financial problems. If the client is having financial difficulties, then it is likely that the shareholders and creditors may start looking for a deep pocket to make good their losses.
  • Senior executives or officers of a client are the subject of a criminal investigation.

There are, of course, a multitude of other hypothetical scenarios that you might consider to be an incident, occurrence or offense, which may reasonably be expected to result in a Claim.

Additionally, the individual specifics of any situation may dictate how seriously you believe there is a potential for a claim. The most conservative approach is to report every incident to your insurer, because your loss record will not necessarily be prejudiced. In fact, many insurers actively encourage early reporting as this provides an opportunity to mitigate the possible consequences. On the other hand, failure to report an incident, especially during a time when you change insurers, may result in a late notification dispute or worse, a denial of coverage.

As eluded to above, the consequences of failure to notify an incident to your insurer prior to changing to another carrier can have disastrous consequences. Errors and omissions insurance is written on a claims made basis. This essentially means that claims must be made during the policy term. If you are considering changing insurers at renewal, you have a duty to ensure that all claims and any incidents that might give rise to a claim, are reported to your insurer before the renewal date (I.e. expiry of your current policy).

There is specific language in many errors and omissions insurance policies, which addresses this. The instanteando.comTMpolicy states:

This insurance does not apply to any claim:

  1. based on or arising out of acts or omissions that occurred or are alleged to have occurred prior to the effective date of this policy if, on or prior to such date, any Insured knew or had a reasonable basis to believe either that a professional duty had been breached or that a claim might be made;

This language, and variations on this theme, can be problematic in that the decision as to whether or not to notify a particular incident is subjective. However, a saving grace is that the doctrine of reasonable forseeability is well tested in the courts and governed by various judicial precedents. Nevertheless, the most conservative approach may be to notify any incidents prior to changing insurers, irrespective of your personal and subjective assessment of the risk, for the reasons outlined above. Any resultant claims are then the responsibility of their former insurer.