This article originally appeared in Goldberg Segalla’s Professional Liability Matters. Read the issue here.
Insureds buy insurance to have protection should a claim occur. Once a loss has been incurred, they often turn to their insurance agent or broker to assist in the claims submission process. What may be a difficult time for the insured can be made more difficult if the insurance agent or broker does not appropriately handle the reporting of the incident, accident, occurrence, circumstance, or claim. If not handled appropriately and in a timely fashion, the reporting of an insured’s claim can quickly turn into an errors and omissions insurance (E&O) claim for the insurance agency.
Delays in reporting claims have resulted in E&O lawsuits against insurance agents and brokers have arisen under both claims made and occurrence policies. Many types of professional liability insurance can be written on a claims-made form, most notably directors and offices (D&O) and employment practices liability (EPL) policies. A claims-made form affords coverage for “claims” first made during the policy period or the extended reporting period (ERP), regardless of when the occurrence took place. A pure claims-made form requires claims to be reported “as soon as practicable” or promptly, which does not necessarily have to be during the policy term. The more prevalent “claims made and reported form” requires the claim and reporting of the claim to the insurer both take place during the same policy term or the ERP. Failure to report the claim within the requisite reporting period will void the claim.
An occurrence-based policy affords coverage for a loss that occurred during the policy period, regardless of when the claim was made against the insured. Common examples include commercial general liability policies, homeowners, and auto insurance. Most liability policies (both claims-made and occurrence-based policies) have timely notice provisions requiring the insured to provide notice of the claim to the insurer immediately, as soon as reasonably possible, or as soon as reasonably practicable. The purpose of timely provisions is to allow the insurer to investigate as early as possible, and to defend or settle the claim. Timely notice provisions are often considered conditions precedent to coverage and, if not complied with, can generate a late notice defense by the insurer causing the insured to potentially lose coverage. The law—with respect to late notice, includes whether and when a carrier has to show they were prejudiced by the untimely notice, and what may count as a reasonable excuse by the insured for the delay—varies from jurisdiction to jurisdiction. Further, property policies generally require that the insured promptly report the loss within a reasonable time, so that the insurer can investigate and appropriately evaluate the claim.
Regardless of the law of the particular jurisdiction, an agent or broker embroiled in a late notice denial has already, in effect, lost. A late notice denial could easily negatively impact business relationships with the insured and/or the insurer. Even if an E&O action is not immediately started against the insurance agency, someone from the agency may be subpoenaed to testify as a non-party witness in a declaratory judgment action brought by or against the insurer with respect to the underlying claim. The prudent insurance agent or broker will want to get an experienced E&O attorney involved to help prepare and defend the agency’s interests at the non-party deposition, which will result in the expenditure of the agency’s time and resources, as well as an unwanted business headache. It also may be time to report a notice of circumstances or a claim under the insurance agency’s own E&O policy—and the prudent insurance agent or broker would be wise to consult the E&O’s policy on reporting terms, an E&O attorney, or E&O claims representative for guidance.
While laws regarding duties of insurance agents and brokers vary from jurisdiction to jurisdiction, it is important to realize that if a claim is reported to them, the agent or broker may be viewed as having a duty or having assumed a duty to report the claim to all potentially applicable insurers, including, in some instances, all layers of insurance. What should be straightforward claims reporting can go awry when the insured reports the claim to the insurance agency, but tells the agency to hold the claim to wait to see if it develops into something that the insured wants to report. First off, you should ask yourself if the insured doesn’t want it reported (yet) to the insurer(s), then why are they reporting it to you? If the insured changes their mind about reporting or the nothing claim develops into a claim that would have been covered but didn’t because of a late notice defense, then the insured will look to the agency and its E&O policy as substitute coverage.
Some agents are willing to play this role for the insured, thereby taking on the associated E&O risk. Some agents feel comfortable in this gray area of claims reporting based on the unfortunate view that they don’t have to immediately provide notice of a claim because they believe, sometimes mistakenly, that they are the agent of the insurer and that notice to the agent is notice to the insurer. Although the concept of the impact of their agency status may be valid, agents who take this cavalier view of claims reporting do so at their own peril. Agents and brokers who make the decision to wait to provide notice of a loss—for a number of reasons, including at the insured’s request or it was mistakenly thought the loss would fall within the insured’s self-insured retention—delay at their own peril.
First, many liability policies require written notice of claim as a condition precedent to coverage. If the insurance agent received only oral notice of the claim, such notice may still be insufficient to satisfy the condition precedent of the policy that written notice of a claim must be supplied to the insurer.
Second, many agency agreements state insurance agents are not authorized to waive policy provisions. (Written notice of a claim must be supplied.) Moreover, agency agreements have provisions requiring agents to promptly report losses and claims to the insurer, as well as indemnification provisions running from the agent to the insurer. Even if the insurer cannot prevail against the insured in late notice defense because its agent had prior notice of the claim, the insurer may bring a claim against the agent, particularly when the agent’s failure to timely report the claim has prejudiced the insurer, for example, in its ability to conduct an adequate investigation, or to raise exclusions in a timely issued disclaimer.
Professional Liability Magazine, a collaborative effort of Goldberg Segalla’s Management and Professional Liability Practice Group, examines the latest best practices, emerging developments, and influential court decisions impacting the defense of professional-service providers. Read our latest issue here.