E&O CLAIM REPORTING: THE aEURoePOTENTIALaEUR? PROBLEMS

By: Matthew S. Marrone, Esquire

To paraphrase Abraham Lincoln, you can please some people all of the time, and all people some of the time, but you canaEUR(TM)t please all people all of the time. In a client-based profession, these words will always ring true. From insurance producers to attorneys, and all professions in between, we will inevitably have clients who are disappointed with some aspect of the service we have provided aEUR" justifiably or not. aEURoeThe insurance coverage should have been more comprehensive.aEUR? aEURoeThe case settlement should have been more favorable.aEUR? aEURoeYour service shouldnaEUR(TM)t have cost so much.aEUR? As professionals, we must accept that our clients will not always be pleased, or even recognize the extent of our efforts to achieve the result obtained.

But where does client dissatisfaction cross the line and become an E&O claim? When should we report this dissatisfaction to our E&O carrier? These are hot issues that courts around the country are considering with increasing frequency. As an insurance producer, you must keep them in mind not only when running your own agency, but also when counseling any professional insureds you have as clients.

Almost every professional liability insurance policy is a aEURoeclaims madeaEUR? policy, which typically provides coverage only for claims first made against the insured and reported to the carrier in writing during the policy period. Coverage is also provided for aEURoepotential claims,aEUR? which are generally defined as any act, error or omission which might reasonably give rise to a claim, provided the insured first becomes aware of the potential claim and gives written notice of it to the insurer during the policy period. Thus, the notice requirements of a aEURoeclaims madeaEUR? policy are very different from those of an aEURoeoccurrence-basedaEUR? policy. Whereas late notice will generally preclude occurrence-based coverage only where the carrier has been prejudiced, a late report under a claims-based policy will void coverage even in the absence of prejudice.

It is relatively easy to recognize claims, which are typically defined as a written demand for damages received by the insured. If you are served with suit papers, you forward them to your E&O carrier to report the claim. But potential claims are not so easy to recognize, and present a virtual coverage mine field. Notably, claims made policies typically do not provide coverage for potential claims based upon any act, error or omission which, at the effective date of the policy, the insured knew or could have reasonably foreseen would ultimately be the basis of a claim or lawsuit. This presents a very large gray area, perhaps best demonstrated by the following hypothetical scenario.

Frank Frugal owns a home in a coastal area, and has insured it through Diligent Agency for several years. It is a modest second home he uses only during the summer months. Due to its location and the fact it is only seasonally occupied, property insurance is difficult to obtain and Diligent has placed the risk with the stateaEUR(TM)s FAIR Plan. Diligent has explained to Frugal it is a limited policy which covers named perils such as fire and vandalism, but notably excludes coverage for water damage. However, the policy is significantly cheaper than more comprehensive insurance available through surplus lines carriers, and Frugal finds this appealing.

During a particularly harsh winter, Frugal forgets to turn the water off and the pipes break and leak throughout the entire house. He notifies Diligent, who reminds Frugal there is no coverage for water damage. Frugal becomes upset, claims he never knew the policy did not cover water damage, and questions why Diligent would sell him insurance that does not cover damage from burst pipes. Frugal writes a letter to Diligent expressing his disappointment, but takes no further immediate action. Diligent does not report anything to its E&O carrier at the time, Lucky Pro.

A few months later, Diligent changes E&O carriers and mentions nothing of the Frugal situation on the new application. Within weeks, Frugal files suit against Diligent, claiming Diligent should have placed better insurance for him. Diligent tenders the claim to its new E&O carrier, Hard Line Casualty, who retains counsel to defend the claim. Shortly thereafter, Hard Line becomes aware of the Frugal letter aEUR" which predated Hard LineaEUR(TM)s policy period aEUR" and files a declaratory judgment action seeking to disclaim coverage. Hard Line claims Diligent reasonably could have foreseen its actions would result in a potential claim, which predated its policy. Diligent then tenders the claim to Lucky Pro, who denies coverage because the claim was made and reported after Lucky ProaEUR(TM)s policy expired, and because Diligent never reported the potential claim during the policy period.