INSURANCE "A stitch in time……………..”

All responsible individuals and business organizations carry liability insurance coverage for protection against claims and lawsuits. Individuals have homeowners, automobile and, if they are prudent, umbrella insurance policies. Businesses, both for-profit and not-for-profit, have policies for commercial auto, general liability, employer’s liability, directors & officers and, as appropriate, professional liability. Most policies that provide liability insurance coverage are “occurrence” based. Others, however, are so-called “claims made” policies. It is extremely important you know the difference so as not to risk losing the coverage you paid for.

Almost all personal lines liability coverage, such as the coverage available under personal automobile and homeowners policies, is occurrence based. An occurrence is an “accident” in which someone else is injured or suffers property damage. The insurance policy in effect at the time of the accident will provide coverage for any subsequent lawsuit or claim that might be brought. For example, if you are in an automobile accident in September of 2006, the automobile insurance policy in effect at the time of the accident will provide liability coverage if someone makes a claim for damages or brings a lawsuit against you regardless of when the claim is made or the lawsuit filed.

With occurrence based policies it is important that you notify your insurance company whenever an accident takes place in order to give the company an opportunity to investigate the matter while memories are fresh and before vital evidence is lost or misplaced. In fact, almost all occurrence based polices obligate insureds to notify the company “as soon as practicable” after an accident and to give the insurance company copies of any demand letters or suit papers. If an insured fails to give timely notice the insurance company must still honor its obligations under the insurance policy unless the late notice prejudices the insurance company’s ability to defend any claims brought against its insureds.

Generally, commercial auto and general liability insurance policies are also occurrence based. However, most professional liability policies such as those obtained by doctors, dentists, engineers, accountants, lawyers and other professionals are “claims made” policies. The same is true for directors & officers policies issued to both for-profit and not-for-profit organizations. If you have a “claims made” policy it is essential that you understand that those policies provide coverage for claims that are made, rather than for accidents that occur, during the policy period. If, for example, in September of 2006 a business receives a letter from a client claiming that one of its professional employees made a mistake or error in September of 2005 and that client now wants damages on account of the error, it is the insurance company whose policy is in effect when the claim is made that has to provide coverage. However, that company only has to provide coverage if the claim is made or the lawsuit brought within its policy period and the matter is reported to the company during the same policy period. Furthermore, in situations where the error giving rise to the claim occurred before the present policy went into effect, the insurance company will only provide coverage if its insured was unaware that he or she had made a mistake for which a claim might reasonably be brought at some future date.

Accordingly, if you have “claims made” coverage of any type it is essential that you notify your insurance company at the earliest of the following events:

* When become aware of an incident that might reasonably lead to a claim being made against you;

* When you receive notice that someone believes you made a mistake; or

* When you are sued.

Both events (first, you knowledge of a mistake, receipt of a complaint, or receipt of a lawsuit, and second, the report of that event to the insurance company) must occur during the same policy period. If your knowledge of a mistake, receipt of the complaint or receipt of the lawsuit occurs during one policy period but is not reported to the insurance company until the next policy period, coverage will be forfeited you coverage and there is no requirement that the insurance company show that the late notice caused any prejudice. Remember, it is policy periods we are talking about. When you renew a “claims made” policy the renewal becomes a new policy period regardless of whether you renew with the same carrier or change insurance companies.

A New Hampshire hospital learned this lesson the hard way. The hospital shifted its “claims made” professional liability coverage from one insurance company to another effective 12:01 a.m. on August 1, 2002. In preparation for that shift in coverage, it gathered information about a number of incidents where patients had bad results and where the hospital either reasonably believed that claims would be made or where claims had actually been made although lawsuits had not been brought. The hospital mailed that information to its insurance company on July 31, 2002 by overnight mail. The notice was received by the insurance company at 9:03 a.m. on August 1, 2002. That was just over nine hours after the expiration of the policy. The insurance company refused to provide coverage for any of the incidents arguing that where claims had been made they had not been reported during the same policy period. With respect to the incidents where claims had not yet been made, they took the position that the company knew about events which could reasonably lead to claims and had not reported that information to the company in the policy period in which the information was learned. The New Hampshire Supreme Court upheld the coverage denials. Catholic Medical Center v. Executive Risk Indemnity, Inc. 151 N.H. 699 (2005).

The moral to the story is that if you have a “claims made” policy, and if you have a reasonable belief that you did something wrong or if you believe your client or customer thinks you did something wrong that might reasonably lead to a claim being asserted against you or if you get sued, you should report that information to your insurance company immediately and, by all means, before the policy that is then in existence expires.

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