Warning: Big Insurance Payments May Be Slipping Through Your Fingers

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

The company promptly notifies its employment practices liability insurer.

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 that contends the company was negligent. The company has tried to work the problem out for more than a year, but the discussions break down and the client files suit.

The company immediately gives notice to its errors and omissions insurer.

After learning the facts surrounding the dispute, the insurer denies coverage because the claim was made during an earlier policy period long before the suit was filed.

Sound unbelievable? Believe it.

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

The company quickly sends the complaint to its D&O insurer.

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

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

Yes, they can.

Why do all these situations end badly?

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

Take heart, though. Insureds, with the guidance of insurance agents and brokers, can take practical steps to avoid these scenarios.

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 are reported to insurers “as soon as practicable” during the policy period.

Insurers strictly enforce these requirements, and the vast majority of U.S. courts back them up. As a result, insureds absolutely must understand what constitutes a “claim,” and when a claim must be reported to insurers.

SO WHAT IS A “CLAIM?”

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

Think about the breadth of that for a second. This definition includes any written correspondence–including an e-mail that seeks any kind of relief on account of a specific wrongdoing.

In the E&O example above it is entirely possible, and even likely that before the client filed suit, it sent some written communication or series of communications that would amount to a demand for relief. A letter demanding the company pay a loss sustained by the client might be easy to spot. An e-mail insisting the insured work for free to fix problems in earlier work performed might not be the kind of communication an insured would think to report to its insurer. It should be.

When a claim involves a longstanding dispute, an insurer will always look at all correspondence with the claimant (with the benefit of 20/20 hindsight!) to determine whether a “claim” was made before the policy period began. If it was, the insurer can confidently deny coverage.

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

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

Particularly in the EPL context, countless claims are denied simply because companies don't think to report employee filings with the EEOC. Because EEOC investigations often take several months to complete, if a policy renews before the employee files suit the insurer will have a bulletproof defense to coverage.

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

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

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

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

What does “as soon as practicable” actually mean? There is no one-size-fits-all answer to this question. Some courts have held that a delay of 45 days is too long. Others have ruled that notice provided three-and-a-half months after the claim was made was given as soon as practicable.

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

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

At this point you may be wondering what a company needs to do to avoid 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 the definitions seem so broad that “claims” will slip through the cracks.

Most insurers are open to changing claim definitions to narrow their scope. Insurers don't enjoy denying coverage (really!) for claims the insured didn't recognize when they were made, and will often agree to change claim definitions to avoid those situations.

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 a lawsuit is filed. While this would solve a reporting problem, it would eliminate coverage for EEOC complaints.

o Assure that your internal reporting is robust.

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

o Limit reporting requirements in policies.

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

o Get help when reporting decisions are difficult.

Sometimes it's hard to decide whether a communication from a claimant actually is a “claim.” Rather than deciding not to report it because they are uncertain, an insured should instead enlist the broker'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, insured companies simply must make sure their insurance premium dollars work for them. The only way that happens is when covered claims are paid. They can make sure that happens by learning what a “claim” is and reporting it quickly.

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