In purchasing a professional liability policy, a firm is counting on a broader financial entity – an insurance company – to absorb all or a portion of the cost of claims and litigation in exchange for premiums paid.
There are a number of articles from AIATrust regarding risk management and how to respond if a claim arises. However, there are few mentions of what to do if your insurer denies your tender of a claim.
“Why would my insurer deny a claim? Isn’t that the whole reason I pay premiums – for coverage?” You ask.
Let’s presume you purchased your first policy from Company A in 2009. You renewed your policy faithfully in 2010, 2011, and 2012. Then you switched to Company B in 2013. In the middle of that year, you received a letter from an attorney putting you “on notice” of a claim against you from a project you had designed back in 2009. You send it you your agent – but the carrier comes back with a denial of coverage. What happened?
There are differing insurance policies. In some, coverage is triggered based on the date the claim is made. In others, coverage is triggered based on the date of the “occurrence”. And some have their own unique language.
In the scenario above, the policy provides:
We will pay for damages and claim expense for any covered claim against you alleging a negligent act, error, or omission in your professional services performed on or after the policy date, provided the claim is first made against you during the policy period.
In other words, the work and claim must be presented during the same policy period to trigger coverage (under this policy). If you did not purchase optional extended coverage from Company A or Company B – you may be left high and dry when you needed insurance the most.
If you have received an initial denial from your insurance carrier, follow these three steps:
- Do not panic. Your request for coverage is not a one-bite-at-the-apple proposition. The notice of claim may not contain sufficient facts (or urgency) to trigger coverage in the eyes of the initial reviewer.
- Stay involved. Do not ignore the claim, your client, or opposing counsel. Briefly tell them coverage has been denied and you need more time to find personal counsel and respond to the claim. You can still be proactive by participating in inspections, assembling your documents, and communicating with your client and sub consultants.
- Contact your legal counsel. Experienced litigation counsel can not only assist you in preparing for and defending the claim against you but will have knowledge of insurance coverage. Counsel will write a demand letter to your carrier using the “legalease” often necessary to encourage your insurer to take a more serious look at the claim and coverage.
- Consider your options. An insurance policy is a juicy target for claimants. You may have been sued even if you did nothing wrong; but that does not mean the lack of insurance will make the claim disappear. If the carrier continues to deny coverage, you should consider whether there is an opportunity to repair the claimed defect or settle the claim out of your own pocket before you incur significant costs and attorney fees defending a matter on principle. It is a bitter pill to settle for nuisance value, but it is a reality of doing business. Even your insurance carrier would balance the cost of defending a claim against settlement opportunities. There is little point in spending $50,000.00 in attorney fees (not to mention the value of your time) for victory in court when you could have ended the litigation for $20,000.00.
If your professional liability insurance was purchased from a “set it and forget it” frame of mind, dust off your policy documents and review your coverage. If you have – or will – switch carriers during your firm’s operation it is imperative that you compare the old and new policies with an eye toward coverage gaps.
Casey Quillen’s firm is a member of the AIATrust Legal Network providing full legal service to design professionals throughout Colorado. Ruebel & Quillen, LLC now has an office in Steamboat Springs, CO to better serve firms West of the Continental Divide.