Picture this. An employee laid off last year decides he was avictim of age discrimination. After receiving permission from theEqual Employment Opportunity Commission, he files suit.

The company promptly notifies its employment practices liabilityinsurer.

The insurer quickly denies coverage because notice is late.

What? He must be kidding.

Nope. This happens every day.

Imagine another situation. A company has a difficult client thatcontends the company was negligent. The company has tried to workthe problem out for more than a year, but the discussions breakdown and the client files suit.

The company immediately gives notice to its errors and omissionsinsurer.

After learning the facts surrounding the dispute, the insurerdenies coverage because the claim was made during an earlier policyperiod long before the suit was filed.

Sound unbelievable? Believe it.

Here's another one. A competitor sues a privately held companyfor interference in their relationships with clients. A year laterthe competitor adds the company's president as adefendant.

The company quickly sends the complaint to its D&Oinsurer.

Just as quickly, the D&O insurer denies coverage because theclaim was made more than a year ago.

What is going on here? Can insurers really do this and get awaywith it?

Yes, they can.

Why do all these situations end badly?

The simple reason is that companies often don't understand theircoverage and don't know when to tell insurers about disputes thatmight be covered.

Take heart, though. Insureds, with the guidance of insuranceagents and brokers, can take practical steps to avoid thesescenarios.

Agents and brokers need to make it clear that D&O, E&O,EPL and similar policies are “claims made and reported” policies.They only cover claims made while the policy is in force that arereported to insurers “as soon as practicable” during the policyperiod.

Insurers strictly enforce these requirements, and the vastmajority of U.S. courts back them up. As a result, insuredsabsolutely must understand what constitutes a “claim,” andwhen a claim must be reported to insurers.

SO WHAT IS A “CLAIM?”

Many insureds mistakenly think a “claim” under a policy means alawsuit, but D&O, E&O and EPL policies typically defineclaims much more broadly. For example, most will include anywritten demand for monetary or nonmonetary relief.

Think about the breadth of that for a second. This definitionincludes any written correspondence–including an e-mailthat seeks any kind of relief on account of a specificwrongdoing.

In the E&O example above it is entirely possible, and evenlikely that before the client filed suit, it sent some writtencommunication or series of communications that would amount to ademand for relief. A letter demanding the company pay a losssustained by the client might be easy to spot. An e-mail insistingthe insured work for free to fix problems in earlier work performedmight not be the kind of communication an insured would think toreport to its insurer. It should be.

When a claim involves a longstanding dispute, an insurer willalways look at all correspondence with the claimant (with thebenefit of 20/20 hindsight!) to determine whether a “claim” wasmade before the policy period began. If it was, the insurer canconfidently deny coverage.

“Claim” definitions don't stop with written demands for relief.Most also include administrative or regulatory proceedings andinvestigations begun by filing a complaint or a notice ofcharges.

You might think proceedings like that would be similar enough toa lawsuit that companies would consistently report them toinsurers. Sadly, that isn't always the case.

Particularly in the EPL context, countless claims are deniedsimply because companies don't think to report employee filingswith the EEOC. Because EEOC investigations often take severalmonths to complete, if a policy renews before the employee filessuit the insurer will have a bulletproof defense to coverage.

The example of a competitor's claim against a private companyand its president doesn't involve a failure to spot and report a“claim,” and yet the result is the same. That situation illustratesa problem specific to private companies.

D&O policies issued to private companies typically willcover the company for its own misconduct. Many companies forgetthis, and don't report claims until a director or officer is sued.The unfortunate result is that if the claim against the company ismade in an earlier policy year, the insurer will deny coverage forthe company and the director or officer named later.

These examples illustrate why it is essential to understand whatconstitutes a “claim” under a “claims made” policy, and to reportclaims during the policy period in which they are made.

That isn't the end of it, however. Remember those words “as soonas practicable” above? An insurer can still deny coverage evenif a claim is reported during the policy period if that noticewasn't given “as soon as practicable.”

What does “as soon as practicable” actually mean? There is noone-size-fits-all answer to this question. Some courts have heldthat a delay of 45 days is too long. Others have ruled that noticeprovided three-and-a-half months after the claim was made was givenas soon as practicable.

Generally speaking, courts seem to require insureds to givenotice as soon as it is reasonably possible to do so, given thefacts and circumstances of the case.

A small number of states, most recently Texas, hold that as longas notice is given during the policy period, a delay in providingnotice will bar coverage only if an insurer can show that it wasprejudiced. While this “prejudice rule” might save some claims in afew states, companies everywhere must do everything possible toreport claims as soon as possible after they are made.

At this point you may be wondering what a company needs to do toavoid becoming an example in an article like this.

There are a number of steps companies should consider:

o Educate staff about what a “claim” is.

Read claims-made policies and understand the scope of the“claim” definitions. Use a broker to help.

o Ask insurers to narrow policy definitions of “claim,” if thedefinitions seem so broad that “claims” will slip through thecracks.

Most insurers are open to changing claim definitions to narrowtheir scope. Insurers don't enjoy denying coverage (really!) forclaims the insured didn't recognize when they were made, and willoften agree to change claim definitions to avoid thosesituations.

A change like that probably will reduce existing coverage,though. For example, an insured may seek to change the “claim”definition in your EPL policy so coverage is triggered later when alawsuit is filed. While this would solve a reporting problem, itwould eliminate coverage for EEOC complaints.

o Assure that your internal reporting is robust.

Staff needs to be instructed to report “claims” as soon as theyare made to the people who will know whether and how to report themto insurers. Insureds should consider regularly polling managers todiscover unreported claims.

o Limit reporting requirements in policies.

Insurers are sometimes willing to limit the obligation to reportclaims by only requiring matters to be reported “as soon aspracticable” after specific individuals (e.g. the general counselor risk manager) learn about them.

o Get help when reporting decisions are difficult.

Sometimes it's hard to decide whether a communication from aclaimant actually is a “claim.” Rather than deciding not to reportit because they are uncertain, an insured should instead enlist thebroker's help to evaluate whether to report the matter.

They should also consider asking for the insurer's input too.Most are happy to provide guidance where they can.

In very hard economic times like we are facing now, insuredcompanies simply must make sure their insurance premium dollarswork for them. The only way that happens is when covered claims arepaid. They can make sure that happens by learning what a “claim” isand reporting it quickly.

William A. Boeck is senior vice president,insurance and claims counsel for Lockton Financial Services inKansas City, Mo.