Navigating the terms of your professional liability coverage can be complicated, especially since there are different types of policies with their own individual reporting requirements. The following explanation of the various policy types (“Claims-made” vs “Claims-made and Reported”) and the reporting requirements associated with them, along with other important policy terms, should help you navigate the potentially complex – but very important – topic of Errors & Omissions (“E&O”) insurance coverage.
Many insured attorneys are often unconcerned with the terms of their E&O policies until there is an issue which causes them to seek coverage from their insurance carrier - either for payment of defense costs (legal fees required to defend a claim), or for indemnity (generally a settlement sum demanded of the attorney). The average Insured is usually aware only that he or she is insured, but is unable to state even the basic terms of the policy without first reviewing it. At the very least, the Insured should be aware of two very important policy terms that could significantly impact the availability of professional liability coverage in the event of a “problem”: (1) the Insured’s knowledge of a claim prior to the inception of his or her subject policy; and (2) notification by the Insured to the insurer regarding a claim or potential claim during the policy period.
1. The Importance Of Proper And Timely Notice To Your Insurer
Professional liability policies are usually afforded on a “claims-made” or “claims-made and reported” basis, meaning that the claim must be made (and often, reported) during the policy period, which is typically one year. Although the language may vary, a “claim” is generally defined as a demand received by the Insured for money or services, including the service of a lawsuit.
Most E&O policies require that the Insured provide the insurer with “immediate” notice of any claim and at least “prompt” notice of potential claims1. These requirements are usually “conditions precedent” to coverage. Other professional liability policies require that notice of a claim or potential claim be provided to the insurer “as soon as practicable2” after an occurrence. It was well-settled that “as soon as practicable” generally equates to the provision of notice within a reasonable time under all the facts and circumstances of each case3. The reasoning behind the prompt notification requirement is to afford the insurer the opportunity to protect itself, i.e., “to protect itself from fraud by investigating claims soon after the underlying events; to set reserves; and to take an active, early role in settlement discussions4.”
It is important to note that an Insured’s delay or failure to give timely notice might be excusable where the Insured had a “reasonable” belief that he or she would not be liable for the subject claim5. The burden of showing the reasonableness of the excuse, however, is on the Insured6. Questions as to whether a good-faith belief exists that an injured party will not seek to hold the Insured liable and whether the belief is “reasonable” under the circumstances are questions of fact reserved for the fact finder7.
2. What Constitutes a “Claim”?
Since liability policies typically require that an Insured notify its insurance carrier “immediately” of any “claim”, it is important for attorneys to know or be able to determine when a “claim” is asserted. Generally, an Insured can turn to his or her policy for guidance, since most claims-made policies provide a definition of claim (usually along the lines of, “a claim is any demand for monetary or non-monetary relief.”).
Two overlapping criteria that tend to demonstrate that a claim exists are: (1) an assertion of legally cognizable damage; and (2) a demand for compensation or redress, which does not necessarily need to be monetary. Some courts have held that a “claim” must relate to “an assertion of a legally cognizable damage, and had to be the type of demand that could be defended, settled and paid by the insurer.”8 However, the threat of future litigation typically does not constitute a claim but is rather a potential claim or “Circumstance”. See Section 3.
Moreover, the law generally does not require that a formal lawsuit be filed for a claim to exist.9 Courts have interpreted claims to require more than a request for an explanation or the lodging of a grievance without a demand for compensation, but less than the institution of a formal lawsuit.10 Thus, where a letter charged an Insured with fraudulent misconduct and breach of fiduciary duty in connection with flipping real estate and advised that a lawsuit would be filed if the Insured did not comply with a request to compensate the complaining company within ten days, a Court held that this letter did constitute a claim, as it demanded compensation (and also because it included a draft copy of a complaint demanding damages).11 Where clients demand (or courts order) uncompensated work by an Insured, that too may be a “claim” as defined, since it has been held that a “claim” is simply a demand for something of right, or as due.12
3. What Constitutes a “Circumstance that may lead to a Claim”?
“Circumstance” is another important term that lawyers should be familiar with. Most claims-made policies will require Insureds to provide notice of “potential claims” or “circumstances that may lead to a claim” and will typically make providing such notice a condition precedent to receiving coverage. “Circumstances” can be more difficult to discern than “claims” and the standards for reporting circumstances vary among policies.
Courts have utilized varying “objective-subjective approaches” to determining whether lawyers have provided appropriate notice of potential claims. Courts typically seek to understand what a reasonable Insured would have foreseen in like circumstances given the insured’s knowledge at the time.13 Whether someone in the same position as the Insured would reasonably have believed that the circumstance would not amount to a “claim” and therefore did not need to be reported is typically a fact-sensitive inquiry.14 However, attorneys should attempt to avoid such factual inquiries, particularly considering the potential adverse consequences (potentially the complete denial of coverage) associated with a finding of ‘late notice’ or ‘prior knowledge’ (the latter being the failure to provide adequate notice of a circumstance in a policy application). This can be done: (1) by erring on the side of caution; and (2) seeking assistance whenever an Insured is uncertain.
4. What To Expect/How To Proceed If A Claim Or Potential Claim Occurs
As noted above, receiving notice of a claim or a potential claim can be daunting at first. It is stressful and can create feelings of fear, anger, resentment, confusion – or all of the above. There are, however, a few “bright line” rules to follow, which will help you avoid unnecessary and preventable coverage disputes in the event of a claim:
A. Timely report the claim or potential claim to your insurance carrier. Call and ask your carrier if you have any questions or doubts about whether you need to give notice.
B. Be responsive and a good communicator with your carrier and any appointed defense counsel; and
C. View your insurance carrier as your business partner (they are effectively that) and work with them to try to resolve any disagreements that may arise.
In sum, there is no one-size-fits-all answer to the question, “What constitutes a claim or a circumstance?” The Courts have provided some guidelines for situations in which the answer to the question seems uncertain. Nonetheless, it is paramount that lawyers read and understand the notification provisions of their policies and appreciate when they should report certain matters. In the event of any uncertainty as to whether a particular matter, happening, development, concern, etc., should be reported, Insureds would be well advised to seek immediate guidance from their insurance broker or another trusted insurance professional.
This article was prepared by Andrew R. Jones, Esq. and Ashley L. Glazewski, Esq. of the New York City-based law firm of Furman Kornfeld & Brennan LLP. Andrew and Ashley work as part of a team of 15 lawyers and paralegals devoted to the defense of attorneys and other professionals in malpractice and disciplinary matters, as well as the defense of construction and personal-injury accidents. For more information about the above topic or the authors, please visit: www.fkblaw.com.
For more information on LPL coverage, visit the New York State Bar Association Insurance Program here.
We trust that the above article was useful and thought provoking; however, please note that it is intended a general guide only, not a complete analysis of the issues addressed, and readers should always seek specific legal guidance on particular matters.
- See Bellefonte Insurance Company v. Eli D. Albert, P.C., 99 A.D.2d 947, 472 N.Y.S.2d 635 (1st Dept. 1984).
- Various terms are utilized by insurers, including “prompt notice,” “soon,” “as soon as practicable.”
- See Heydt v. American Home Assurance, 146 A.D.2d 497, 498, 536 N.Y.S.2d 770, 772 (1st Dept.1989) lv. dismissed 74 N.Y.2d 651; Women's Christian All. v. Exec. Risk Indem., Inc., No. 02-2594, 2003 U.S. Dist. LEXIS 12188 (E.D. Pa. July 3, 2003).
- See Brandon v. Nationwide Mut. Ins. Co., 97 N.Y.2d 491, 743 N.Y.S.2d 53, 769 N.E.2d 810 (2002).
- See Paramount Insurance Co. v. Rosedale Gardens, Inc., 293 A.D.2d 235, 239, 743 N.Y.S.2d 59 (1st Dept. 2002).
- See White v. City of New York, 81 N.Y.2d 955, 598 N.Y.S.2d 759, 615 N.E.2d 216 (1993).
- See Argentina v. Otsego Mutual Fire Insurance Co., 86 N.Y.2d 748, 750, 631 N.Y.S.2d 125, 126, 655 N.E.2d 166 (1995).
- See Evanston Insurance Company v. GAB Business Services, Inc., 132 A.D.2d 180, 521 N.Y.S.2d 692 (1987).
- See Strauss v. Sheffield Insurance Corp., 2006 WL 6158771 (S.D. Cal).
- See Charles Dunn Company, Inc. v. Tudor Insurance Company, 308 Fed. Appx. 149 (2008).
- See id.
- See id.
- See Chicago Insurance Company v. Lappin, 58 Mass. App.Ct. 769, 792 N.E.2d. 1018 (2003).
- See James F. O’Connell & Associates v. Transamerica Indem. Co., 61 Wash. App. 103 (1991).