Receiving notice of a professional liability claim can be shocking, daunting, and worrisome. Familiarizing yourself with the process of responding to Claims and Potential Claims will help make facing them easier, and reduce stress, should they ever materialize. The following is an explanation and guide for a typical claim process with simple suggestions to spot and timely report matters to your insurance carrier. This will help you to avoid worrying about lawsuits against you and instead allow you to focus fully on your clients.
- “Claims-Made Coverage” – What is that Again?
The focus of this guide is “claims made” policies, as they make up almost all lawyers’ professional liability policies. There are other types of policies called “occurrence policies,” more typically in the general liability context - bodily injury and property damage - but these are rare in the lawyers’ professional liability world and they will not be discussed further here.
Most claims made policies define Claim as “a demand received for money or services.” The policy will typically say in the first paragraph that it provides coverage for a Claim “first made during the policy period” and, in most instances, “reported during the policy period.” So, it is the making and reporting of a “Claim” that generally “triggers” the coverage available.
Some attorneys do not realize that a Claim therefore does not have to be a lawsuit. A letter or email from a client accusing you of making a mistake and seeking to hold you responsible can be deemed a Claim. Even a verbal demand can sometimes qualify.
- What is a “Claim”? What is a “Circumstance that may lead to a Claim”?
Many lawyers have difficulty identifying if and when they should give their carrier notice of various “happenings” in their day-to-day professional lives. Most know to give immediate notice of a lawsuit naming them, but there are less-obvious matters, such as a client or a Court expressing “disappointment” and/or demanding that certain actions be taken. Liability policies typically require that an Insured notify its insurance carrier “immediately” of any “Claim”, so it is important for lawyers to be able to determine when a “Claim” is being made.
- What Constitutes a “Claim”?
Generally, an Insured can turn to her policy for guidance, since most claims made policies provide a definition of a Claim. This is usually along the lines of, “a Claim is any demand for monetary or non-monetary relief”. If this does not help, or if the policy does not contain a definition, there are some guidelines lawyers can use.
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. It has been held in some Courts 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.” The threat of future litigation also typically does not constitute a Claim. Rather, the threat of litigation is merely notice of a Potential Claim. In all the above examples, however, you may be required to give prompt notice of “Circumstance”. See discussion infra.
Conversely, the law generally does not require that a formal lawsuit be filed for a Claim to exist; Courts have interpreted Claims to require more than a request for an explanation or criticism without a demand for compensation, but less than the institution of a formal lawsuit. Thus, where a letter charged an Insured with fraudulent misconduct and breach of lawyers’ 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). 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.
b. What Constitutes a “Circumstance”?
Lawyers should also be familiar with another important term: “Circumstance” (or Potential Claim). Most claims made policies will require lawyers 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.” The standards for reporting circumstances vary among policies and predicting potential future activity can be infuriating.
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. 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. Lawyers should attempt to avoid such factual inquiries considering the potential adverse consequences 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). The consequences can range from having to provide further explanation, to potentially the complete denial of coverage. Avoiding factual disputes can be done: (1) by erring on the side of caution; and (2) seeking assistance whenever an Insured is uncertain.
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. 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, should be reported, lawyers would be well advised to seek guidance.
- The Importance of Proper And Timely Notice To Your Insurer
Most LPL policies require that the Insured provide the insurer with “immediate” notice of any Claim and at least “prompt” notice of Potential Claims. See Bellefonte Insurance Company v. Eli D. Albert, P.C., et al, 99 A.D.2d 947, 472 N.Y.S.2d 635 (1st Dept. 1984). These requirements are usually “conditions precedent” to coverage.
Most LPL policies required that notice of a Claim or Potential Claim be provided to the insurer “as soon as practicable.” 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 case. 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, 542 N.Y.S.2d 520, 540 N.E.2d 715. 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 discussions.” See Brandon v. Nationwide Mutual Insurance Co., 97 N.Y.2d at 496, 743 N.Y.S.2d at 56, 769 N.E.2d 810.
An Insured lawyers’ 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 Claim. See Paramount Insurance Co. v. Rosedale Gardens, Inc., 293 A.D.2d 235, 239, 743 N.Y.S.2d 59, 62 (1st Dept. 2002). The burden of showing the reasonableness of the excuse, however, is on the Insured lawyers. See White v. City of New York, 81 N.Y.2d 955, 598 N.Y.S.2d 759, 615 N.E.2d 216 (1993). 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 finder. 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, 167 (1995). Once again, err on the side of caution and contact your broker or other insurance professional should you need guidance.
- Prior Knowledge and Coverage Investigations
In view of the above, it is advisable that immediate notice be provided to one’s insurer in the event of a Claim or Potential Claim. Doing so will divest the Insured of his or her notice responsibility. The insurer will usually employ its own lawyer - “coverage counsel” - to handle the Claim and among other things, investigate whether the Insured possibly had undisclosed “prior knowledge” of the Claim for which the lawyer now seeks coverage. The insurer or its appointed representative will likely have a preliminary conversation with the insured lawyer reporting the Claim, ask to review the documents/pleadings involved in the Claim, and review the Insured’s policy application to confirm whether the Claim was previously disclosed, etc. It is a condition of the policy to comply with these requests for information. The process need not be difficult or arduous and is described further below.
- The Coverage Investigation
The inquiry is generally conducted by coverage counsel retained by the insurer. The insurer may assign defense counsel to the Insured pending the outcome of the coverage investigation. If the investigation determines that the insured lawyer had knowledge prior to the inception of the policy of the Claim for which coverage is sought, the insurer may have viable coverage defenses.
There are multiple reasons why an insured lawyer may not have previously disclosed his or her prior knowledge of the Claim at issue in the insurance application. Some of these reasons include:
- Fear that the application may be denied;
- Fear of increased premiums;
- Embarrassment (personal or to the Firm);
- Personal Opinion (a belief that the Claim is baseless); or
- State of denial.
Coverage counsel may explore any of the foregoing possibilities to determine whether or not the insured lawyer had prior knowledge of the Claim. The investigation may include a review of the insured lawyers’ file, interviews, and research into the lawyers’ background and prior insurance policies.
b. The “Reasonableness” Test
Once the coverage investigation is complete, the insurer employs a test for determining whether a policy’s notice provision has been triggered, i.e., “whether the circumstances known to the Insured at that time would have suggested to a reasonable person the possibility” that a claim would be made. See Security Mut. Ins. Co. v. Acker-Fitzsimmons, Co., 31 N.Y.2d 436, 340 N.Y.S.2d 902 (1972). The Insured bears the burden of proving the reasonableness of his excuse, which must be reasonable under all the circumstances. See Security Mut. at 443; Sirignano v. Chicago Ins. Co, supra.
c. The Outcome
Should the insurer determine that the Insured lawyer had prior undisclosed knowledge of the Claim, coverage for that Claim is typically denied. However, the policy generally remains in effect for its term. The insurer may commence a declaratory judgment action, requesting that the Court declare that the policy is not triggered in light of the Insured’s prior knowledge of the Claim, and on grounds of misrepresentation. If the insurer is successful, the Insured bears uninsured exposure, which, depending on the nature of the plaintiff’s damages, could be devastating to the lawyer. It is therefore extremely important that the lawyers seeking LPL coverage disclose any prior knowledge of Claims or Potential Claims on the insurance application to avoid the potential loss of coverage.
- Top 5 Takeaways
Receiving a Claim or a complaint is stressful and can create feelings of fear, anger, resentment, wishing for retribution, confusion, alarm, uncertainty – or all of the above. Those are neither pleasant nor productive circumstances for making smart decisions. You want to proceed in a way that is smart, considered, and best protects you - and your client. There are a few “bright line” rules that will lead you to calmer waters upon which to make the right moves:
- Don’t panic. You will get through this!b.
- Timely report the Claim or Potential Claim to your insurance carrier and, if applicable, your attorney. Call and ask your carrier if you have any questions or doubts about whether you need to give notice.
- Be responsive and a good communicator with your carrier during the coverage investigation. Again, ask questions and seek guidance or advice if needed.
- It is possible that you and your carrier may decide to appoint defense counsel – a local attorney who is qualified to defend the allegations made against you. Your policy may give you the opportunity for input into the selection of defense counsel. Be responsive and a good communicator with whoever is appointed as defense counsel.
- 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.
Allegations of negligence or wrongdoing can be asserted at any time, even – and often – without grounds. While this is alarming, you should be focused on doing your work, not worrying about getting sued. The above explanation hopefully will help you confidently take the next steps if a Claim or Potential Claim is made or asserted against you. It provides advice on how to spot and timely report matters to your insurance carrier and gain clarification in situations of uncertainty. These strategies will become second nature, and part of your routine practice, by employing them over time. You can then focus on your work and your clients, safe in the knowledge that you are protected should a Claim or Potential Claim arise.
* This article was prepared by Andrew R. Jones, Esq., Partner in the New York City-based law firm Furman Kornfeld & Brennan LLP. Andrew’s practice focuses on professional liability and insurance coverage, including the direct defense of lawyers and other professionals, and advising insurers regarding professional liability (“errors and omissions”) insurance policies. Mr. Jones has drafted various insurance policies for domestic and international insurers. Andrew has advised on insurance coverage issues throughout the U.S. and internationally. Andrew is part of a team of 15 lawyers devoted to the defense of attorneys and other professionals in malpractice, disciplinary and insurance coverage matters. For more information about the above topic, the author or the firm, please visit: www.fkblaw.com.
We trust that the above article was useful and thought-provoking; however, please note that it is intended as a general guide and opinion only, not a complete analysis of the issues addressed, and readers should always seek specific legal guidance on particular matters. For more information on LPL coverage generally, contact USI Affinity today. We trust that the article was useful and thought-provoking; however, please note that it is intended as a general guide and opinion only, not a complete analysis of the issues addressed, and readers should always seek specific legal guidance on particular matters.
 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.
 Various terms are utilized by insurers, including “prompt notice,” “soon,” “as soon as practicable.”
 As set forth above, the Courts now appear to be adopting a mixed “subjective/objective” standard.
 This outcome may be contrasted with a scenario in which the insurer determines that the insured lawyer affirmatively misrepresented certain facts on the insurance application. In that scenario, the insurer may rescind (cancel) the insurance policy that was issued in reliance upon material representations. See Chicago Insurance Co. v. Kreitzer & Vogelman, No. 97 Civ. 8619 (RWS), 2000 WL 16949, at *15 (S.D.N.Y. Jan. 5, 2000).