Certainly there are valid arguments on both sides of the issue. Some risk managers are wary of reporting incidents to the insurance company. There are a number of reasons for this—whether because it represents extra work for the risk manager, for whom time is the scarcest resource, or fear that costs will skyrocket down the road. Risk managers suspect that reporting incidents as well as claims to the insurance company will worry underwriters, giving the latter reason to seek a pound of flesh at renewal in the form of higher premiums.
Risk managers often fear that “no good deed goes unpunished” and that giving the insurer a heads-up will result in higher renewal prices. Call it paranoia or justified concern, but many risk managers avoid being hypervigilant in reporting incidents.
The Insurer’s Perspective
Insurance companies may have a different take, because what they do not know can hurt them. They often prefer that risk managers err on the side of caution in reporting incidents and occurrences that may develop into claims or lawsuits. There are many reasons these companies would rather play it safe.
First, the policy wording may warrant this type of reporting discipline. To confirm the obvious, risk managers should review the precise wording of the insurance policy under the “conditions” section to determine whether incidents must be reported to the insurance company. Some policies may require reporting of any occurrence that could give rise to a claim or lawsuit as a condition of coverage.
Further, some believe that frequency precedes severity. Incidents may be a weather vane, barometer, or precursor of future claims. Claims and lawsuits will inevitably arise, giving underwriters a full picture of the risk resulting from reporting the incident. Put differently, underwriters cannot see the complete picture and have an accurate perspective on a risk if they are deprived of the knowledge of incident patterns.
In addition, reporting incidents gives the insurer the option to investigate while the proverbial trail is still warm, before memories fade and key evidence is lost or destroyed. It may allow an insurer to proactively gather facts, which can be invaluable in defending or evaluating a potential claim. It is better to know early on whether the evidence is favorable or damning, so the adjuster can then decide whether to defend or settle a claim. By contacting a potential claimant and reaching an early and economical settlement, the adjuster can ensure that the claimant never becomes a plaintiff. Lastly, the insurer may have resources—especially in loss control—that can help policyholders keep small problems from becoming big headaches. For example, insurers can track incidents and spotlight emerging trends in an account’s loss picture, creating a servicing opportunity for the insurer.
The Risks of Underreporting
Another risk looms. If the policy requires the policyholder to report occurrences and later discovers that he or she has not, there can be adverse consequences. Again, insureds may fear that reporting incidents will cause premiums to rise, but if an underwriter discovers that an insured is “gaming” loss reporting and suppressing incidents, the premium will increase anyway. If incidents are underreported to make the insurer look better as a risk, then trust degrades, leading to higher renewal premiums or even non-renewal. Aggressive insurers might even argue that it amounts to a material misrepresentation. The risk of insurer pricing action may be greater from game-playing than it is from reporting incidents. The risk of underreporting outweighs the perils of overreporting.
No risk manager wants the company’s coverage jeopardized by an insurer accusing the insured of breaching a policy condition requirement to report incidents. Even if the insurer loses a coverage tussle on this issue or sends a reservation of rights letter instead of an outright denial, the cloud over insurance coverage is a hassle for the risk manager. Imagine explaining to your CEO that the company’s insurance limits are in jeopardy because you decided not to send a letter to an underwriter on time. That problem is much larger than risking a marginal increase in premium after reporting incidents. In fact, some might argue that the only “bad” notice is no notice. One maxim for the risk manager, therefore, may be, “When in doubt, report it out.”
Of course, a company that totally self-insures need not wrestle with these issues. For the remaining 99.9 percent of companies that buy some form of insurance, paying close attention to incident reporting can preserve the asset of insurance coverage and even guide the focus of loss control efforts.