The claims notification process is an important aspect of securing adequate protection for an organisation and its management. A policy is often purchased with the hope that it will never be needed. However, for many, it is only a matter of time before a claim or circumstance arises that requires notification to an insurer.
In this article, we will explore the concept of a claim notification in the context of the following coverages:
- Directors and officers liability insurance
- Employment practices insurance
- Management liability insurance
- D&O insurance for nonprofits
You may also find that similar concepts apply to a broad range of financial lines insurances, such as professional indemnity insurance, cyber insurance, and even crime insurance to a certain extent. Keep in mind, however, that each policy is strictly interpreted according to its own terms and conditions.
Claim notification: A definition
A claim notification describes the process that an organisation and its management must undertake to advise an insurer of a new claim or circumstance. It is an important aspect of protecting management, as it involves identifying a situation that is likely to trigger a policy’s coverage and then reporting this to an insurer in accordance with its relevant procedures.
When an organisation or its management becomes aware of a claim, a policy’s conditions will stipulate how this claim must be notified. An insurer will typically require that details of the situation be provided within a specific timeframe. Often, this means that a claim notification should be made as soon as practicable, as not to prejudice an insurer’s position.
A claim notification is the first step in addressing a managerial-related claim. However, notifying an insurer of a claim does not necessarily mean that all costs incurred will be covered. Rather, it will open up a dialogue between an insured and an insurer, in order to prepare a suitable defence and consider how coverage will apply as a claim develops.
Claims made policy
A claims made policy has a unique claim notification process. A claims made policy requires that a claim be made against an insured and be notified to the insurer during the policy period, for any resulting loss to be covered. For this reason, it is best to refer to such coverage as claims made and notified, to adequately account for the second condition of notification.
A claim is usually defined as a notice of legal proceeding against an insured. It is typically a formal demand, so you should recognise it when you see it.
Common examples of a claim include:
- A letter of demand
- The service of a writ
- An invitation to a proceeding
In any case, the key takeaway is that a claims made policy relies less on when an alleged wrongful act took place, and rather when a claimant brings their grievance to the attention of an insured. Provided that a claim is made against an insured and notified to the insurer in the policy period, coverage should attach as intended.
Circumstance that may reasonably lead to a claim
It is not only claims that must to be notified to an insurer, but also any circumstance that may reasonably lead to a claim. In essence, this aims to capture any grievance which has not yet materialised into a claim but may do so in the future. This significantly broadens the scope of what should be notified to an insurer.
A circumstance is less obvious than a formal claim and requires a more nuanced understanding. A circumstance can be broadly defined as any knowledge of an incident that could reasonably lead to a claim. This could be information disclosed in a conversation, correspondence between parties, or even the knowledge of an act that could eventually result in a claim.
For example, consider a manager that submits a financial report to a stakeholder for which they rely to make an important decision. Subsequent to the submission of the report, the manager identifies a critical error that could reasonably lead to a future claim. He notifies the insurer of the circumstance as a precautionary measure.
How to make a claim notification
When an organisation and its management become aware of a claim or circumstance, they are required to make a claim notification to their insurer.
A claim notification should include the following information:
- A description of the alleged wrongful act
- The date that the wrongful act allegedly occurred
- The date that the claim or circumstance became known
- The identity of the claimant
- An estimate of the claim quantum
- The policy number to which the claim notification attaches
- A copy of all relevant documents
A claim notification is typically made by email correspondence. An organisation will first notify its broker, who will then notify the insurer. This allows a broker to organise the necessary information in an orderly manner, and provide claim advocacy as required. To ensure a claim is handled correctly, it is best to maintain this hierarchy of communication throughout the process.
Coordinating the claim response
Once an insurer has been notified of a claim or circumstance, it will work together with an insured to address the matter. There are a number of elements to consider in this process.
An insured is required to cooperate with an insurer throughout the claim process. To achieve this, an insured will have to engage in open, honest, and continuous communication. A failure to cooperate can prejudice an insurer’s position, and jeopardise an the coverage of the insured. Any attempt to obstruct an insurer’s enquiries can have significant consequences.
Duty to defend
A policy will include a duty to defend provision that outlines which party – the insurer or the insured – has the right and obligation to defend an underlying claim. A policy with duty to defend language places this onus on the insurer, while non-duty to defend language – also known as duty to indemnify – places this onus on an insured.
An insurer is likely to insist that its panel counsel be used as legal representation. Due to the volume of work panel counsel performs for an insurer, they are often able to offer their services at a highly discounted rate. Additionally, they are typically well qualified for the claims assigned to them and are already familiar with an insurer’s litigation guidelines.
Advancement of defence costs
An insurer is likely to advance defence costs to an insured. This means that an insurer will be obliged to reimburse an insured for costs incurred within a certain timeframe, once the self-insured retention has been eroded. The advancement of defence costs is conditional on a claim being eventually covered by the policy – if it isn’t any costs advanced will need to be repaid.
What is a reservation of rights letter?
A reservation of rights letter may be issued by an insurer if it recognises a potential issue with coverage. It is an insurer’s way of advising the insured that that indemnity may not be available to an insured, in whole or in part.
A reservation of rights can occur for a variety of reasons:
- A claim infringing on policy exclusions
- An insured failing to adhere to policy conditions
- Late notification of a claim
By reserving its rights, an insurer is notifying an insured that its coverage position is yet to be determined. It does this as to not prejudice its position, by making it clear from the outset that there may be uncovered aspects of the claim. This does not relieve any party of its contractual obligations, however; an insured must continue to cooperate and an insurer will continue to advance costs.
Late claim notification
A late notification describes a situation where a claim notification is made after the expiry of the policy period in which it should have been correctly notified. Typically, this has significant consequences for an organisation and its management, in that a claim is likely to be declined. However, there may be a provision that provides some relief – a continuity of coverage benefit.
Continuity of coverage allows a late notification to be accepted, as long as the organisation has held continuous, uninterrupted coverage with the same insurer over time. This benefit is often included as one of a policy’s extensions and creates a strong incentive for an organisation to remain loyal to its insurer – because, if an organisation changes insurers, continuity is lost.
A continuity date or pending and prior litigation date usually represents the date in which continuity commenced, and is listed on the policy schedule. When a pending and prior litigation date is referenced, this will relate to a pending and prior litigation exclusion. A late notification may be accepted for a claim arising after this date, as long as an insurer has not been prejudiced as a result.
An opportunity for claim settlement may arise throughout the defence of a claim. Claim settlement can describe the process of entering into negotiations with a claimant to bring a matter to conclusion, but also the process of an insurer discharging its obligation to an insured – by arranging payment to an organisation and its management for any covered loss.
Once a defensive strategy has been agreed upon, an insurer and insured will work together to achieve a result that is mutually beneficial. In some instances, a claim will fade away into inactivity, while in others, a negotiated payment will be required to meet the demands of a claimant. An insurer will typically have a preference for settling a claim at the earliest possibility.
An insurer will presume that an organisation has indemnified its management in accordance with any directors indemnification agreement. Then, it will settle its liability to the insured up to the limit of liability. However, not all costs will be ultimately borne by an insurer. Some may be subject to cost allocation or claim contribution, while others may be recovered by means of subrogation.
Claim notification: An example
Now that we have explored the claim notification process, we can tie it all together.
An organisation purchases an insurance policy to protect its management from board of directors liability. The policy period is twelve months, from 31 December last year to 31 December this year. The retroactive date is unlimited, and the self-insured retention is defence costs inclusive – written with non-duty to defend language.
The organisation has been operating for many years in the financial advisory industry. Following a recent financial association seminar, the chief executive officer is contacted by a regulatory authority with queries about how the affairs of the organisation are handled. Specifically, they request the production of certain sensitive documents.
As a precautionary measure, the organisation makes a claim notification to the insurer – citing a circumstance that may resonable lead to a claim. The insurer accepts this notification and requests that the insured select legal representation from its panel counsel to begin defence preparation. Defence costs are advanced by the insurer on a without prejudice basis.
The claims notification process is an important aspect of securing adequate protection for an organisation and its management. A policy is often purchased with the hope that it will never be needed. For many, however, it is only a matter of time before a claim or circumstance arises that requires notification to an insurer.