Since the recession the number and severity of professional liability claims are well-above historical records. The uptick is partly due to rising defense costs; a typical claim costs in excess of $50,000. To protect against this exposure, attorneys and other professionals purchase errors and omissions (E&O) coverage. Generally, these policies provide liability coverage against third party claims alleging acts, errors or omissions in the rendering of—or failure to render—professional services. This article stresses the importance of recognizing when a “claim” has been made in order to preserve coverage.
Absent an act or omission that constitutes a “claim,” neither exclusions nor exceptions to exclusions matter. The term is almost always defined in the policy. Claims are not simply lawsuits. Claims can include a written notice from a governmental authority notifying the policyholder of its intent to commence an investigation; a request to toll or waive a statute of limitation relating to a potential claim; or an administrative or “other” proceeding. It is imperative that policyholders understand the breadth of the definition, because E&O policies are almost always “claims made” policies. To preserve coverage, claims made policies require not only that the claim be made during the policy period, but that the policyholder timely reports the claim. While it may seem draconian, an insured’s failure to timely report a claim is often a complete bar to coverage.
Not all policies are created equal. The reporting requirements can be very restrictive (requiring that a claim be reported during the policy period) or you may purchase a policy with an extended reporting period (requiring notice within a certain number of days after termination of the policy). If you are purchasing new coverage, pay attention to these notice provisions. You may also consider purchasing “tail coverage” if you are retiring, or you are contracting with a new insurer whose policy does not include a retroactive date that encompasses a period of known exposure. This is an optional form of coverage that extends the window for when a claim must be made for a period after the expiration of the policy.
Tail coverage is not the only way a policyholder may be insured against claims made after the policy period. Typically, E&O policies contain an interrelated wrongful acts provision. In the example below, the provision is embedded within the definition of “claim:”
All CLAIMS arising out of the same ACT, or series of related ACTS, shall constitute a single CLAIM, and shall be deemed to have been made during the POLICY PERIOD in which such CLAIM arising from the ACT or series of related ACTS is first made against such ASSUREDS
This provision collapses all claims that arise out of the same wrongful act or series of related wrongful acts made after the termination of a policy period into a single policy period in which the first claim was made.
While maximizing coverage in some instances, this provision may also have the opposite effect. For example, if there are still available limits of insurance under the prior policy (policy #1)—or greater limits than the later policy policy #2—then it is to the insured’s advantage to have all claims made during policy #2 relate back to policy #1. If, however, there are no limits left under policy #1 (for example, the carrier settled a lawsuit on the insured’s behalf for policy limits) it may operate to exclude coverage entirely. Of the reported cases that have analyzed the issue, almost all have found in favor of relatedness. The decisions are for the most part result-driven; finding interrelatedness where doing so would yield the greatest coverage.
While policy language varies greatly, at its core, a “claim” is a demand for relief against in insured for wrongful conduct. It is crucial for the policyholder to be aware of how broadly the term is defined. Under a claims made policy, a failure to timely report a claim will most likely forfeit coverage.
Camilla Cohen is an associate with Ver Ploeg & Lumpkin in Miami. Contact her at firstname.lastname@example.org.