Mind the Gap
By Marc McNulty, CIC, CRM
DUTIES AFTER LOSS
Are your clients aware of their policy conditions?
It’s common for agents who are new to the industry to get into the groove of speaking with prospects, discovering their exposures, and attempting to solve their issues with a comprehensive insurance plan. In fact, you might even talk about policy exclusions as part of the process.
But do you ever discuss policy conditions with your new business prospects or existing clients? For example, do you talk to them about the need for prompt reporting of claims?
The situation rarely comes up in personal lines, as claims are almost always reported quickly. You might run across a situation, however, where a home is damaged and the owners didn’t take any steps to prevent further damage.
Use every means to emphasize that the prompt reporting of claims is critical.
This ties in with another condition in the policy. Let’s suppose that during a severe storm, a large tree branch falls onto a home and crashes through the roof as well as breaking a window. If the homeowner knows a storm is on the way, he or she must take measures to prevent items in the house from being damaged by the oncoming storm’s wind and rain.
In some cases, this is easier said than done and might create a sticky situation. While I’d like to think that most claims adjusters will be reasonable and wouldn’t expect the homeowner to jump through hoops to prevent further damage, homeowners policies clearly spell out this requirement in the “Duties After Loss” section of the policy conditions.
For example, the HO 00 05 05 11 contains the following language:
C. Duties After Loss
In case of a loss to covered property, we have no duty to provide coverage under this policy if the failure to comply with the following duties is prejudicial to us. These duties must be performed either by you, or an “insured” seeking coverage, or a representative of either:
- Protect the property from further damage. If repairs to the property are required, you must:
a. Make reasonable and necessary repairs to protect the property; and
b. Keep an accurate record of repair expenses
A similar provision exists in personal auto policies. It should be noted that in both cases the insurer will pay for reasonable expenses incurred to prevent further loss.
The commercial side
Where things start to get really tricky is in commercial lines, especially in executive lines of coverage such as professional liability, directors and officers liability, and employment practices liability.
To illustrate, here is sample language from an executive liability policy that provides D&O/EPL coverage:
SECTION V – DUTIES OF THE INSUREDS IN THE EVENT OF A CLAIM
As conditions precedent to coverage under this policy:
- The insureds shall give us written notice of any claim made against any of the insureds for a wrongful act as soon as practicable after any executive of the named insured has knowledge of such claim, and shall cooperate and provide information as we may reasonably require, including but not limited to providing a description of the claim, the nature of the alleged wrongful act, the nature of the alleged injury, the names of the claimants, and the manner in which the insureds first became aware of the claim. As soon as practicable, the insureds shall furnish us with copies of reports, investigations, pleadings and other papers in connection with the claim.
The next two parts of the section outline how the insureds must provide information, assistance, and cooperation when the insurer requests them. It also states that the insureds may not settle any claim, incur any defense costs, or otherwise assume an obligation without prior written consent from the carrier.
This condition also can dovetail with the prior knowledge exclusion in executive liability policies. This same D&O/EPL policy form contains the following exclusion:
C. Prior Knowledge
We are not liable to pay, indemnify or defend any claim based upon, arising out of, or in consequence of, or in any way involving any wrongful act committed, attempted or allegedly committed or attempted prior to the policy period of the applicable Coverage Part if:
- Prior to the earlier of the following dates:
a. The inception of the applicable Coverage Part;
b. The inception of the original Coverage Part of which the applicable Coverage Part is a renewal or replacement; or
c. The Continuity Date, if any, stated in the Declarations for the applicable Coverage Part;
any executive knew that such wrongful act is or would reasonably be regarded as the basis of a claim; or
- There is a previous policy under which the insureds are entitled to coverage for such claim.
A scary story
These conditions apply only to large companies with dozens of executives, right? Not at all! I have a client who is a one-man operation, and he got dragged into an ugly situation in which these provisions came into play, so it can indeed happen to a firm of any size.
In this case, our insured purchased a general liability/professional liability policy in 2013 and a year later received an attorney’s letter on behalf of an organization that asked him to cease the use of a trademark to which he was rightfully entitled and had previously registered. The letter did not threaten to initiate a lawsuit or demand payment of any sort. Our insured thought this was a request without merit, so he disregarded it. When he completed his renewal applications in the ensuing years, he answered “no” to the question that asked if he was aware of any loss, damage, or circumstances that might give rise to a claim.
For over four years, he didn’t hear from anyone about the request to cease using his trademark. Then, out of the blue, he received a letter from a different attorney who represented the same organization that had originally made the request. This letter threatened legal action and listed the options available to the organization to enforce its legal rights.
The insured retained counsel and prepared a response to the organization. Two months later, he received a letter from a collection agency with a five-figure invoice for the unauthorized use of his trademark, copyright infringement, and a 2% late fee. At that point he reached out to our agency and filed a claim.
You can probably see where this is going. The insurer denied the claim on the basis that the original demand letter and the correspondence that followed four years later originated from the “same original cause or single source event.” Our insured did not provide prompt notice to the carrier during the policy period in which the original demand was received, so the policy conditions were not met.
While this is an example of how a one-person operation can be affected by late claims reporting, you can imagine how the situation might unfold in larger organizations, especially if communication among the executive team isn’t robust and consistent.
For example, let’s say a firm’s chief executive officer is aware of a situation that may give rise to a claim but doesn’t disclose it to anyone else. If the chief operating officer is the one who completes and signs the insurance application, he or she could honestly answer “no” to the question about knowledge of a situation that could result in a claim. Should the situation escalate and a claim is reported in a subsequent renewal term, there’s a good chance coverage will be denied because of the late reporting condition.
Given this scenario, how can you help your clients? The answer is simple: Use every means to emphasize that the prompt reporting of claims is critical.
Start by telling your clients in person, then follow up in writing, whether it is in a proposal/summary of insurance or in your new business and renewal correspondence.
The more frequently you reinforce this message, the greater the likelihood that your client will remember to report a situation that could give rise to a claim. This will save both you and your client a lot of potential headaches down the road.
Marc McNulty, CIC, CRM, is a principal at The Uhl Agency in Dayton, Ohio, and has been with the agency since 2001. He divides his time among sales, marketing, technology and operational duties. You can reach Marc at email@example.com