Insurance claims can be daunting, especially in the case of liability insurance policies which are by their very nature complex. Unfortunately, these claims often arise at a time of distress when the insured’s primary focus is salvaging client relationships and keeping their business out of the courts. Oftentimes, critical mistakes are made at the very onset of the process, and whilst they may be as a result of a simple oversight by the insured, these errors can have dire consequences.
Your liability policy will only respond where you are held legally liable by a third party for losses they have suffered due to your alleged negligence. You cannot, however, wait for a court to decide whether you are liable before informing your insurer. The first step is to notify your insurer as soon as the third party claims from you, or even sooner – when you realise that you may have made a mistake and there is a likelihood that you may receive a claim.
Some policies may be quite prescriptive regarding the timeframe for notification, such as product recall policies, or rectification claims under construction PI policies where notification must be done before remedial work is commenced. However, most policies will use fairly vague terminology such as “as soon as reasonably possible” or “immediately”. This could leave the broker and the insured uncertain as to when the obligation to notify arises.
The simple answer is that ALL claims made by a third party against the insured should be notified to the insurer immediately upon the insured receiving notice of the third party’s intention to hold them liable. A claim can be in the form of a verbal demand, a letter of demand, summons, or any other means that conveys an allegation that the policyholder is liable for a loss.
If the third party has not yet approached the insured but the insured is aware of the possibility that a loss has, or may have been suffered, and that they may be held liable by a third party, it can be tricky to decide whether to tell the insurer. If the insured thinks their negligence may have caused loss, or that someone else may believe that the insured was negligent (even though that loss may not yet have resulted in a demand by a third party), the insured should advise their insurer.
Also, the insured’s own subjective views on their liability is not relevant. This means that even if the insured does not believe they made a mistake, but there is a likelihood that someone else will try to hold them liable, the insurer should be notified. If the issue is important enough to be discussed at a Board meeting or a Risk Committee meeting, it is best to tell your insurer. Whether the notification was done within a reasonable period will largely depend upon the circumstances of each case, including the knowledge available to the insured at the time.
While an insured may believe that they have the right to make decisions on their own claim, and while they may subjectively be of the view that there was no negligence, if they wish to successfully claim on their liability policy, their insurer should still be notified. One of the main reasons for early notification is that the policy provides a very important benefit to the insured – it provides for the costs of defending the insured against spurious claims, which go further than covering the cost of an attorney. The insurer has the option to take over the defence of the insured, effectively making them the decision maker in respect of the claim. The insurer thus becomes the risk carrier, allowing the insured to continue with their business.
This wealth of experience in handling litigation is one of the major benefits of having comprehensive liability insurance cover with a reputable insurer. As litigation can be time consuming and stressful, it is best to partner with an insurer who has the expertise to assist you through this treacherous process. It is the insured’s responsibility to advise the insurer that the risk insured against has come into effect and that assistance is needed.
In Part 2 we will consider specific questions relating to notification.
THIS ARTICLE APPEARED IN THE FEBRUARY 2019 EDITION OF FA NEWS
