GPSOLO April/May 2009
Small Print, Big Problems
Reporting Issues and Claims–Made Professional Liability Insurance Coverage
Although it’s not the most riveting subject matter to most people, the small print in insurance policies can be interesting and informative reading. In fact, one might argue that reading the small print in a lawyers’ professional liability insurance contract should be mandatory for any lawyer before a policy is purchased. The contract not only protects the insured against certain losses, it imposes some duties on the insured. Failures to know, understand, and comply with the duties set out in this small print can result in a loss of coverage.
The two paragraphs below are excerpts from the Minnesota Lawyers Mutual (MLM) Claims-Made Professional Liability Insurance policy. The “Coverage” and “Claims-Made Provisions” paragraphs embody the essence of the claims-made concept of insurance:
WE will pay all sums up to the limit of OUR liability, which the INSURED may be legally obligated to pay as DAMAGES due to any CLAIM: (1) arising out of any act, error, or omission of the INSURED or a person for whose acts the INSURED is legally responsible; and (2) resulting from the rendering or failing to render PROFESSIONAL SERVICES while engaged in the private practice of law or from rendering or failing to render PROFESSIONAL SERVICES as a PART-TIME EMPLOYED ATTORNEY OF A GOVERNMENTAL BODY, SUBDIVISION, OR AGENCY.
A CLAIM is covered only if made during the POLICY PERIOD or extended reporting period and reported to US: (1) during the POLICY PERIOD; (2) within 60 days after the end of the POLICY PERIOD; or (3) during the extended reporting period. The act, error, or omission giving rise to the CLAIM must have occurred: (1) during the POLICY PERIOD; or (2) prior to the POLICY PERIOD and on or after the PRIOR ACTS RETROACTIVE DATE, if the INSURED had no knowledge of facts which could reasonably support a CLAIM at the effective date of this policy. A CLAIM is deemed made when: (1) a demand is communicated to the INSURED for DAMAGES or PROFESSIONAL SERVICES; (2) a lawsuit is served upon the INSURED seeking DAMAGES; or (3) an act, error, or omission by any INSURED occurs which has not resulted in a demand for DAMAGES but which an INSURED knows or reasonably should know would support such a demand. We will not provide coverage for any CLAIM arising out of the same, related, or continuing PROFESSIONAL SERVICES which resulted in a CLAIM prior to the first policy issued to the INSURED by US.
Lawyers’ professional liability insurance coverage is written today exclusively on a claims-made basis. Insurance companies do not like surprises. The claims-made concept was developed by insurers to assist in more accurately predicting the exposures being assumed under policies covering “long tail” risks (i.e., risks where the claim might not manifest itself until months or even years after the wrongful act, error, or omission has occurred). The ability to properly predict the exposure being assumed allows the insurer to accurately price the insurance policy. Claims-made policies also assist in determining which insurer (in a series of insurers) is liable for a specific claim in situations where the date on which the wrongful act giving rise to the claim took place is unclear. ( Professional Liability Coverage Triggers, Dallas, Texas: International Risk Management Institute, Inc., April 1995, first reprint.)
As stated in MLM’s “Coverage” and “Claims-Made Provisions” paragraphs above, the insurance contract imposes duties on both the company and the insured. The failure to comply with the terms and conditions of the policy can adversely affect the coverage an insured is entitled to under that policy and, in some cases, can lead to a complete denial of coverage. On the other hand, an insurer has a duty to act in good faith in applying the terms and conditions of the policy, and its failure to do so can result in a successful claim for damages against the company.
The issue of late reporting of claims may lead to coverage disputes and claim denials under claims-made policies. As noted above, under the MLM policy, as with other claims-made policies, in order for coverage to apply, the claim has to be made and reported during the policy period. Many insurers offer a grace period for reporting, as does MLM. The reporting language offers protection to the insured as well as the insurer. As the court noted in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Willis, 296 F.3d 336 (5th Cir. 2002):
The purpose of claims-made policies, unlike occurrence policies, is to provide exact notice periods that limit liability to a fixed period of time “after which an insurer knows it is no longer liable under the policy, and for this reason such reporting requirements are strictly construed.” Resolution Trust Corp. v. Ayo, 31 F.3d 285, 289 (5th Cir. 1994). Allowing coverage beyond that period would be to grant the insured more coverage than that which was bargained for, and to require insurers to provide coverage for risks not assumed. See United States v. A. C. Strip, 868 F.2d 181, 187 (6th Cir. 1989). Ultimately, a claims-made policy’s notice requirement “actually serves to aid the insured by extending claims-made coverage beyond the policy period” FDIC v. Booth, 82 F.3d 670, 678 (5th Cir. 1996) (citing FDIC v. Barnham, 995 F.2d 600, 604 & n.9 (5th Cir. 1993)).
The Eighth Circuit stated in FDIC v. St. Paul Fire & Marine Insurance Co., 993 F.2d 155, 158 (8th Cir. 1993):
“[C]laims-made” policies permit the reporting of acts not yet in litigation. This provides additional protection for the insured, because coverage could extend to a suit not brought until long after the policy has expired, as long as the insured provides notice to the insured [sic] of potential claims. Yet this highlights the reciprocal responsibility of the insured to report all acts and occurrences that could become future claims. Thus the notice requirement sets the parameters of the coverage under the policy.
Avoiding late notice issues with an insurer should be a priority with every firm. Implementing a few relatively simple procedures can help ensure that all reportable events are reported in a timely manner.
First and most important: Read your insurance policy. Although claims-made policies offered by various insurance companies follow the same principles in general, there can be important and relevant differences in the details. For example, there can be significant differences in the definition of the term “claim.” That term is defined very broadly in the MLM policy:
“CLAIM(S)” means: (1) A demand communicated to the INSURED for DAMAGES or Professional Services; (2) A lawsuit served upon the insured seeking DAMAGES; or (3) An act, error, or omission by any INSURED which has not resulted in a demand for DAMAGES but which an INSURED knows or reasonably should know would support such a demand.
Some policies define a claim as simply a demand for money or services or a suit. These policies will, however, often also define the term “incident” or “potential claim” and will impose a duty to report not only claims, as defined in the policy, but also incidents and potential claims.
Other important policy provisions to become familiar with include: (1) the notice of claims provision, which details when a claim must be reported, and (2) all policy provisions dealing with whether an event or events constitutes a single claim or multiple claims.
When the existence of a claim is not disclosed or is concealed by a member of a firm, coverage could be voided for all members of the firm for that claim. Fortunately, insurers have developed a means to deal with this coverage issue through what is commonly referred to as “Innocent Insured Protection.” The Innocent Insured Protection paragraphs below are excerpted from the MLM policy. The wording of the MLM provision is fairly typical of lawyers’ professional liability policies in general. In the context of this article, please note paragraph (2):
Innocent Insured Protection
(1) WE will provide coverage for any INSURED who did not personally participate in or acquiesce to any actual or alleged dishonest, criminal, malicious, or deliberately fraudulent act, error, or omission of another INSURED, provided that the INSURED who did not participate in or acquiesce to the act, error, or omission which gives rise to a CLAIM: (a) had no knowledge of or reason to believe that any such act, error, or omission was being committed; (b) took appropriate action to prevent further wrongdoing immediately after learning of the act, error, or omission; and (c) immediately notifies US after obtaining personal knowledge of such act, error, or omission.
(2) If a CLAIM has been concealed from US by an INSURED who was responsible for such CLAIM and which, but for such concealment, would have been covered, WE will cover any INSURED who did not participate in, acquiesce to, or fail to promptly notify US after having personal knowledge of such concealment.
To be covered under this Innocent Insured Protection provision the INSURED must promptly notify US of such acts or concealment and otherwise comply with all policy provisions. WE will have the right to recover against any INSURED responsible for any CLAIM EXPENSE or DAMAGES paid under this paragraph.
Note that in order for the innocent insured coverage to apply, the insured must, among other things, promptly notify the insurer.
Prompt, early reporting of claims not only is required, but it also aids in claim repair. Claim repair is a process by which an error can be corrected before it leads to damages; this process also can aid in mitigating damages. Legal malpractice cases lend themselves particularly well to the claim-repair process. Claim repair is most effective when started as soon as possible after a problem arises. Generally, the longer the time lapse between the problem and the initiation of repair efforts, the less likely there will be a successful repair.
In attempting to defeat a denial of coverage based on late notice, the insured often argues that because the insurer was not prejudiced by the late notice, coverage should not be denied. In many jurisdictions, if giving notice of a claim is an express condition precedent of coverage, absent an express waiver by the carrier, noncompliance with the notice provision by the insured will bar recovery, regardless of a showing of prejudice. The following cases out of Minnesota illustrate this point: Cargill, Inc. v. Evanston Ins. Co., 642 N.W. 2d 80 (Minn. Ct. App. 2002); Winthrop & Weinstine, P.A. v. Travelers Cas. & Sur. Co., 993 F. Supp. 1248 (D. Minn. 1998), aff’d, 187 F.3d 87 (8th Cir. 1999); and Sterling State Bank v. Virginia Sur. Co., 285 Minn. 348, 173 N.W. 2d 342 (1969).
The best defense to a denial of a claim for late notice is to avoid the situation. Read and understand your insurance policy—yes, even the small print. Make certain all firm members, including support staff, have a clear understanding of the claims-made concept of the lawyers’ professional liability policy, especially the reporting requirements. Most insurers will ask at renewal whether anyone in the firm is aware of claims or incidents that could result in claims. Circulate that request and require that all lawyers provide a response, whether positive or negative. When in doubt, report, report, report. The insurance company will then make the decision as to whether or not to establish a claim file.
Although underwriters do consider claim experience in evaluating a risk, that scrutiny will pale in relation to having to deal with a malpractice claim where coverage has been denied as a result of late reporting. Err on the safe side. Don’t let the small print on your professional liability insurance cause you big problems.
Timothy J. Gephart is vice president of claims at Minnesota Lawyers Mutual in Minneapolis. He may be reached at email@example.com.