Slow Reporting of Claims: How it Benefits Your Client to Act Fast

The Scenario

Your client calls. They got sued last month and the plaintiff filed some kind of motion with the court along with the lawsuit. They’ve hired a lawyer to respond. You tell your client to drop the suit in the mail to you, and it arrives the following week. After a couple of days on your desk, you mail it to the carrier, which receives it maybe 45 days after the case was filed. A little slow but not too bad, right? Unfortunately, no.

It’s not uncommon for a large percentage of first reports under E&O policies to include a summons and complaint that have been served on the client. The carrier often receives no early warning that a problem is afoot, and sometimes is left scrambling to engage defense counsel or to obtain an extension of time to respond to the complaint.

It Happens

Difficult situations arise when a claim is first presented to the insurer months or even years after litigation began. The reasons for delay vary, but they often fall into one of several categories.

The client:

  • just didn’t think about the insurance policy;
  • thought about the policy but didn’t think it would provide coverage for the claim;
  • thought they could handle the claim for less than the deductible/retention;
  • thought the claim wasn’t that bad and feared the impact on their insurance renewal;
  • wanted to maintain full control over the litigation and decided to worry about the insurance recovery later — and to take their chances on whether there would be an insurance recovery at all. They may even settle the case on their own and then notify the carrier of the case and seek reimbursement arguing the settlement was in the best interest of insurer and insured.

We’ve seen all of those situations arise, some of them involving claims for many millions of dollars, and some involving large and sophisticated companies and associations with a risk manager and an in-house legal department.

What The Policy Says

Most carriers place standards on reporting that usually are something like “as soon as practicable” or “immediately.” The standard may vary depending on whether it’s notice of a potential claim or whether a claim actually has been made or a suit has been filed against an insured. The addition of an “and reported” requirement to claims made policies has also enhanced the need for timely reporting.

The application of a policy’s claims reporting standard to a given situation is a matter of state law, and each state has formulated its own approach, generally through common law — the collection of court decisions dealing with the issue.

As a general rule, however, the longer the insured waits to report a claim, the more risk they run of a disclaimer, particularly if events between the making of the claim and the report to the insurer can be viewed as prejudicing or harming the insurer’s rights or position in some way. And if it’s reported outside the time parameters and grace period of a claims made and reported policy, as a general rule you can pretty well forget about coverage.

Even if coverage is not disclaimed altogether, a late report can result in the insurer declining to pay some or all of the defense costs the insured incurred prior to reporting the claim, either on the basis of the late report or due to violation of a policy term that the carrier will cover only defense or other costs incurred with the carrier’s consent. The policy may also contain a term that states the insurer has the right to select counsel and defend.

In many states the duty to defend does not begin until the claim has been tendered to the carrier, so no matter what the policy says about late notice and delay, and whether or not the insurance company could prove prejudice, the insured could be barred from making a claim for pre-tender fees by operation of law.

A settlement without consent of the carrier likely will violate a policy term prohibiting such settlements.

The End Result

Let’s get back to the scenario we started with — how bad can a 45-day delay be? Most litigation moves very slowly at the outset, and often early defense costs are not significant. But in the event of a request by the plaintiff for preliminary injunctive relief, the pace of litigation — and fees — can be frightening.

That’s because the plaintiff is trying at the outset of the case to get an injunction, a court order not for money but affecting behavior and rights. One of the requirements to obtain an injunction is that the party asking for it convince the court that they are likely to win the case in the end. A plaintiff unsuccessful in getting preliminary injunctive relief may be discouraged and drop the case. Aside from the legal impact on the case, it may be critical for business reasons for each party to win the motion for an injunction.

So the injunction request is almost always a hard-fought part of the litigation, often resolved very early in a case. Huge costs can be incurred in just a month or two. Learning there is no coverage for those costs, when there might have been if the case had been timely reported, can be a severe blow to an insured.

So can a default judgment. One may be issued when the insured has not retained counsel and hasn’t advised the carrier of the case in time.

What To Do

In addition to advising your client when to report problems, it’s a good idea to also advise how. Fax and overnight mail may be wise, from them to you and from you to the carrier. And in some situations, you might have them send the report directly to the carrier, with a copy to you, to save even more time.