Learning Your E & O Coverage – Claims Made Policy

Although it is possible that a lawyer has an E & O policy that is an occurrence policy, but I am unaware of a lawyer E & O policy on the market today that is an occurrence policy.  Thus, chances are any E&O policy a lawyer or law firm might have is a claims made policy.  The distinction is very important.

Timely reporting provides the protection you purchased

The Claims Made v. Occurrence Distinction

The seminal Georgia case describing the difference between claims made policies and occurrence policies is Serrmi Products, Inc. v. Ins. Co. of Penn, 201 Ga. App. 414, 415, 441 S.E.2d 305 (1991).  A claims-made policy is a policy where coverage is effective typically when the allegedly wrongful act is discovered by the insured and brought to the attention of the insurer within the policy period. See e.g., 7A Appleman 312, cited in Gulf Ins. Co. v. Dolan Fertig & Curtis, 433 So.2d 512, 514 (Fla. 1983) (cited with approval in Serrmi, supra.) Changing or giving extensions of time to receive or report claims “negates the inherent difference between the [‘occurrence’ and the ‘claims made’] contract types. Coverage depends on the claim being made and reported to the insurer during the policy period.” Serrmi, 201 Ga. App. at 415. To change the timing of when a claim must be made and reported is “tantamount to an extension of coverage to the insured gratis, something for which the insurer has not bargained.” Id. (emphasis in original). To allow such an extension would not be merely changing a condition but would in effect rewrite the contract between the two parties. Id. (citing Gulf Ins. Co., supra).

What all this means is that if a claim is made or becomes known to the attorney, then the attorney needs to report it to the insurance carrier within the same policy period.  A delay in reporting the claim may result in a loss of coverage.  Thus, by way of example, assume a policy if effective from February 1, 2010 through January 31, 2011.  Under a straight claims made policy, if a claim is made or the attorney becomes aware of facts that reasonably could be expected to result in a claim (this langauge may vary policy to policy) during the policy period, AND if the claim is then reported to the insurance company during the same policy period, then the claim will be covered by that policy, even if the alleged wrongful conduct happened prior to the policy period.  

The Retroactive Date

The policy may contain any number of terms or conditions affecting this general description.  For example, the policy may have what is known as a “retroactive date.”  That date serves as a limit to how far back the wrongful conduct may go back.  This date may be negotiable with the carrier, obviously costing more the further back in the time the retroactive date.  When an attorney begins coverage with a new insurance carrier, the carrier may have a recent retroactive date.  Usually, the retroactive date will not change as the policy is renewed since the carrier has already agreed to cover risks for the time period in question.  For an increased premium, the retroactive date may be eliminated or moved back in time.  Obviously, it becomes advantageous to the attorney to stay with a carrier with an extended period of time.  The longer with the carrier, the less of concern the retroactive date becomes.

The Extended Reporting Period

The policy may also have what is known extended reporting period.  This will allow the attorney to report a claim that is made during the policy period for some time frame after the end of the policy period.  Sometimes these terms will allow a 30 to 60 day extended period to report a claim.  Sometimes the extended reporting period will only apply if the claim is made towards the end of the policy period in order to allow an attorney a reasonable amount of time to report the claim.  In the absence of an extended reporting period, however, the claim must be reported within the policy period in which it is made.  That means that a claim made on the last day of the policy period will have to be reported that very day.

What Is A Claim

A claim is typically defined as an oral or written demand for monetary or non-monetary damages, including any judicial or administrative proceeding.  Not all policies have this exact language.  If the claim arguably arises out of or is related to legal services, the claim will need to be reported timely.  There is often a provision in the definition of a claim or the insuring agreement that requires reporting knowledge by the attorney of facts that would reasonably be expected to support a claim.  

Report Claims, And When In Doubt, Report Claims

Having a claims made policy means knowing your policy period and not procrastinating on reporting claims when they become known or the facts that would support a claim become known, even if they are not in suit, and sometimes even if the claim has not been asserted by the potential claimant.  Many attorneys risk or lose their coverage because they wait to report claims, hoping they will somehow be resolved or simply go away.  Optimism in this case is the attorney’s enemy.  Some attorneys will also delay reporting a claim or potential claim due to fear of a premium increase or later non-renewal. 

Reporting a claim is seldom the wrong choice.  The stringent reporting requirements of claims made policies makes ignorance of what to do when a claim arises a potential disaster for an insured.

The insured is obligated to report a claim or potential claim to the carrier.  Many professionals, and lawyers especially, often try to handle claims internally to avoid reporting to the carrier.  This delay in reporting jeopardizes coverage.  Professional liability polices are very explicit on how and where to report a claim.  The reporting requirements cannot be stressed enough because the failure to comply with the policy provisions can bar coverage for an insured.  This happens all too often. 

One uncovered claim could cost the firm hundreds of thousands of dollars in defense costs alone.  Carriers will not typically punish a firm for reporting a potential claim that is not acted upon, and if the claim is made and pursued, then coverage for that claim will almost always be better than a few dollars saved on later premiums.

For additional information on claims made policies, try reading this or this.

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