All professional liability insurance policies require the insured to report claims timely as a condition to coverage. This is especially important at the time for renewal of insurance coverage. When a policy is being renewed, the application will ask if the insured is aware of any claims or potential claims. Professionals often worry that notifying the insurer of a “potential claim” will result in higher premiums or even outright rejection of an application for coverage, and may interpret “potential claims” narrowly to exclude ongoing disputes. Contrary to popular belief, reporting potential claims rarely affects insurance premiums or availability. However, failure to report timely and accurately can be quite costly if the insurer later denies coverage.
The key question, of course, is what is a “potential” claim that must be reported? Must you call your broker or insurer every time a client makes even the slightest complaint? Of course not. On the other hand, ignoring a problem until your client files a lawsuit may result in no coverage. While every situation is unique and there are few hard and fast rules, here are some general principles to keep in mind when deciding what to report and when to report a potential claim:
Don’t wait. If your client has or is threatening to retain an attorney, notify your insurance carrier or broker. Do not wait until you are actually served with a lawsuit.
It doesn’t matter who’s right or wrong. Even if you are certain that the claim is unjustified or frivolous, report it anyway. False or frivolous accusations or even correctable errors still cost money to address and you may need your carrier’s assistance. You will definitely want the carrier’s assistance if a lawsuit results.
It’$ alway$ about the money, even if it makes no cents. Make the call whenever your client mentions your “mistake” and “you owe me money” in the same conversation. The owner is not always going to identify a particular error precisely or know the exact cost of its correction – if that were the case, knowing what to report and when would be easy. More typical would be a general complaint that the project is over budget, has seen an inordinate number of RFIs and resulting change orders, followed by a comment that the design team needs to shoulder some of the financial burden. Even if you learn of the client’s comment secondhand, contact your insurer or broker.
Read your policy. Insurance policies define important terms such as “claims” and “potential claims.” Not all insurers use the same definitions and there can be changes from year to year. Generally, a “claim” will be defined as a demand for money or services. Review the language – it may be clearer than you expect. Or not.
If the government knows, make sure your carrier knows. If you learn that a complaint has been lodged with your licensing board or another state or federal entity, immediately notify your carrier or broker – even if the complaint is successfully resolved in your favor.
This is not good-bye. Reporting a potential claim does not mean that you cannot continue to work closely with the owner and other project participants to find solutions, to control costs, and to manage future risks. It just means that if the relationship breaks down, you have preserved your coverage and given the insurer an opportunity to help keep a small issue small.
Pride goeth before the fall. Design professionals take great pride in finding clever and creative solutions to problems. Even if they caused them. Especially if they caused them. Don’t avoid reporting a potential claim in the hopes that you can successfully manage the relationship without involving your insurance.
Other telltale signs that you may have a reportable situation:
- You have called an attorney (or think you should);
- You have been asked to cut your fee or write a check to the owner or contractor to cover the cost of a change order;
- Your client withholds or threatens to withhold fees as an offset against costs he/she believes are your responsibility;
- The contractor has written a letter to the owner blaming extra time or costs or both on design errors and omissions. (Remember, it doesn’t have to be true to be reportable.); and/or
- A change order or series of related change orders for which you believe you may have some culpability exceeds 5% of the base construction cost. (This is a rough order of magnitude, nota precise figure)
When in doubt, make a call. Your carrier or broker can tell you if circumstances are sufficient to require reporting a potential claim. They will appreciate your honesty and your attention to managing risk so that small problems stay that way.