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People frequently overlook one of the best values of a liability policy which is the insurance company pays to investigate and defend a claim. But the insurance company has to receive timely notification of a claim or incident to trigger or initiate these defense expenses. Too often the insured (you) contact your legal counsel and forget to call your insurance agent to report the claim.
An association received a letter from an attorney representing a terminated employee seeking restitution for alleged discrimination. The association sent the letter to its attorney who did a little research and wrote a letter to the employee’s attorney saying “go away.” Several months later the association received a letter announcing a court award of a judgment to the former employee. The organization did not respond to the complaint nor appear in court because it failed to notify its registered agent of its new address.
At this point the association finally contacted its insurance agent to file an Employment Practices Liability claim. The insurance agent presented the claim which the insurance company denied due to late reporting. The association was very lucky and had a good agent who after much pleading and negotiation the insurance company agreed to pay the defense costs from that point forward. The carrier was within its rights to deny the claim.
What went wrong?
The association did not call its insurance agent as soon as it received the original demand letter but rather had its legal counsel “handle it.” This common practice jeopardizes your insurance coverage. Frequently attorneys tell association executives to contact them as soon the person becomes aware of a claim or potential legal action. A few attorneys even tell clients they will advise the association if it should submit the claim to its insurance company.
WRONG! The insurance company is the only party that decides whether or not a claim is covered. So your first phone call must be to your insurance agent so he or she can guide you in filing a claim or notice with the appropriate insurance companies. Neither your attorney nor insurance agent should decide whether or not to report a claim.
Every insurance policy requires claims to be reported in a timely manner. The insurance company wants to investigate the claim immediately while memories are fresh, people are available and the evidence can be preserved. Many states have laws that stipulate late reporting can relieve an insurer of its responsibility to defend and pay a claim. A few states mandate that the reporting delay has to have a “material effect” on the company’s ability to defend the claim to negate coverage. Regardless of the applicable law, you are better served when the insurance company begins its investigation promptly.
Second, the insurance company’s responsibility to defend the insured is the most valuable coverage under a liability policy. Defense costs can exceed the actual claim payment. For example you may win in court or convince the claimant to go away but will still have defense costs.
Each policy’s defense provisions stipulate if the insurer has the right and duty to defend the insured. If the insurer does not have a duty to defend, there may be an option for the insured to tender its defense to the insurance company. However even if you do not tender the defense to the company the carrier still has to approve in advance any defense expenditures paid by you. Under most reimbursement provisions, the insurer will advance defense expenses (pay before the claim is settled).
It is important to know how defense costs are covered under each policy. In most general liability and auto policies defense costs are paid in addition to the policy liability limit(s). The full limit is available to pay any settlement or judgment. Most Directors & Officers and professional liability policies have defense expenses within the policy limit thereby reducing the amount of money available for claim payments. Some insurance companies offer an endorsement (for an additional charge) making defense expenses “outside” the policy limit. Check with your insurance agent to determine the defense provisions for your key liability policies.
You are probably paying a lot for your insurance policies and should receive its full benefits. Therefore all claim and incident notices should be filed promptly to the insurance company. Make sure every supervisor, manager, executive, general counsel and key volunteer (board and committee members) knows how to report any incident or event that could lead to an insurance claim to the proper person. Remind them often of the importance of timely notice and how to report an incident or claim.
The association’s first call or email should be to the insurance agent or broker who can guide them through the reporting process. The second call can be to General Counsel or your outside legal counsel but it is more important to notify the insurance company via your insurance agent. Don’t rely on your attorney to decide if you have insurance coverage; only the insurance company can make that determination.
Late claim reporting can cost you thousands (or more) of dollars in defense costs that the insurance company would have paid (within the terms of the policy) if you told them sooner.