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Insurance policies usually contain a section defining the policyholder’s duties; its particularly important that you understand what your responsibilities are in the event of a claim. With liability policies in particular, which will involve the insurance company’s obligation to provide for legal defense of a claim or suit, this duty will include a requirement that claims be reported to the insurance company “promptly” or “…as soon as practicable…”, the terms most often found in these types of policies.
Interpreted literally, that requirement means “right now”, or as soon as possible after the policyholder was presented with a claim. Certainly in most circumstances that one can imagine a policyholder would be able to forward a claim to his insurer on the same day that it is received. It would only be in rare cases characterized by extraordinary circumstances where the policyholder would be unable to drop a copy of a complaint in the mail the day it was received.
It is, however, a principal of contract law (and insurance policies are contracts, after all) that a contracting party must establish that a breach was “material” before seeking remedies, such as denial of coverage, for a breach of contract terms. Along those lines, an insurance company usually must show that it was prejudiced by the failure of its policyholder to provide timely notice of a liability claim before it may deny coverage on the basis of late notice. Interpreting policy language strictly to exclude coverage for a claim due to a late claim report would violate public policy and create several problems: it would give insurance companies a windfall in premiums without having to provide any agreed upon coverage, it would violate a policyholder’s reasonable expectations of coverage and it could harm the victims of an insureds negligence who would be denied proceeds from a policy which might be the largest available source of compensation for their injuries, all due to a harmless breach of a term in the policy.
In fact, this is why courts in most states will not void insurance coverage on the grounds of late notice unless the insurer can establish that it has been prejudiced in some way by the delay in receiving notice of a claim. A minor breach, one that does no harm to the non-breaching party, will not justify either a claim for damages or the rescission of coverage provided under the insurance contract.
These facts so far apply to “occurrence” liability policies, by far the majority of all liability policies written. With these types of policies coverage is triggered by an occurrence that takes place during the policy period. Things are different for policies that are issued on a “claims-made” basis. Under a claims-made policy, coverage will apply only if a claim is both made against the policyholder and reported to the insurance company during the policy period. Put another way, unlike an occurrence policy the insurance company will never be responsible for providing coverage under a claims-made policy for any claim made after the policy expires. Occurrence policies continue to provide coverage and protection long past their expiration date; claims made policies are only useful as wallpaper once they expire.
This fact has a clear and significant impact on claim notice provisions found in claims made policies. The courts of many states have addressed the issue of late reporting in a claims made policy and have generally concluded that the notice provisions of a claims made policy are enforceable. There is no requirement that an insurer show that it was prejudiced by receiving a claim after the expiration of the policy. If a claim against the insured comes in during the policy period and the insurance company only receives notice after the policy has expired, the carrier has a valid and enforceable late-notice defense under a claims-made policy.
The corollary, of course, is that the carrier will not have such a defense as long as it receives timely notice of a claim during the policy period. What this means to you is that you must know which of your liability policies are written on a claims made basis; typically these will be D&O, Employment Practices, Fiduciary, Errors & Omissions and malpractice types of policies. For these and any other claims made policies you need to be alert to anything that could constitute a claim, and make sure it is reported before the policy expires.
One last caveat: Insurers will also require timely reporting of claims made within the claims made policy period. Here’s an example of a common problem with this we often see: a policyholder with an EPL (Employment Practices Liability) policy gets notice of an EEOC action; in most EPL policies, that’s a claim. The policyholder, thinking its a minor issue that won’t go anywhere or won’t exceed the deductible, fails to report it to the insurance company until, months later (but still within the policy period), the big lawsuit arrives. Even though the insurance company may have then been notified of the claim within the policy period, odds are good they’ll still invoke the late notice provision and seek to deny coverage.
Bottom line: don’t sit on anything that is or could be a claim. If you have any questions about how this might affect you in a particular case, call us.