FEATURED ARTICLE

Potential Claims: To Report Or Not To Report? (Part I of II)

Reprinted with permission. Originally published in the PLUS Journal - September 2011 - Issue XXIV, Volume 9

By Michael R Sarner. Michael Sarner is an attorney and Senior Vice President with Hays Companies

"Should I report this situation to my insurer?" The correct answer to that question is most often an emphatic "yes!" Failure to provide timely notice to an insurer can result in a myriad of issues, including the possibility of voiding coverage for a Claim [1]altogether. However, while prompt notice to an insurer is typically recommended, reporting a Potential Claim to an insurer without sufficient detail can create significant risk and ultimately result in an uncovered Claim. This article will highlight the perils of prematurely reporting a Potential Claim under a claims made insurance policy, and will offer suggestions as to how an insured might best sidestep certain of those perils.

Claim vs. Potential Claim

When considering the risks of reporting, it is important to distinguish between a Claim and a Potential Claim under a claims made insurance policy. By virtue of the definition of Claim, most claims made policies provide relatively clear guidance as to when a Claim has been made against the Insured. The policies are similarly clear that when a Claim has been made, the Insured is required to report the claim in a timely fashion. [2]As such, when a Claim has been made against an insured, it is usually important to give notice to the insurer in relatively short order.

In addition to requiring the reporting of Claims, many claims made policies will also provide the opportunity for an Insured to provide notice of a Potential Claim, which is typically a set of facts or circumstances that the Insured believes may ultimately give rise to a Claim. While the Insured may choose to report a Potential Claim, it is generally not required to do so. The benefit of reporting a Potential Claim is if the notice is accepted by the insurer, then any Claim subsequently made against the Insured arising out of the circumstances surrounding the Potential Claim will be deemed to have been made during the current policy period. This allows an Insured to insulate its future insurance policy limits of liability from erosion, while utilizing an expired policy's limits of liability that can no longer be used for future Claims. As such, reporting Potential Claims can be a very efficient use of the limits of liability provided by a claims made insurance policy. In fact, it is not uncommon for certain insureds to, as they approach the end of a policy period, "laundry list" their Potential Claims in a mass notice to their insurer, with the thought that if any of those ultimately turn into a Claim, they will be able to utilize the limits of liability under that expired policy.

However, in an effort to avoid an annual, exhaustive list of vague circumstances that the insured attempts to characterize as Potential Claims, many of those insurance policies will require that a certain degree of specificity be included with the notice of a Potential Claim. For example, the insurance policy may require that the insured include the "particulars" of the Potential Claim including:

All facts related to the Wrongful Act that may give rise to a Claim;
The name of each individual allegedly involved in or affected by the Wrongful Act;
The dates of the circumstances that may give rise to a Claim; and
The reasons for anticipating a Claim. [3]

Failure to include sufficient detail when reporting a Potential Claim can result in the insurer refusing to accept the Potential Claim. This can become an important issue if a reported situation ever does develop into a Claim, because future insurers may exclude coverage based on the fact that, although not accepted, the situation was reported under a prior insurance policy.

But what qualifies as sufficient detail when reporting a Potential Claim? Further, when and why will an insurer exclude coverage based on prior notice? While the analysis remains necessarily fact specific, the rationale set forth in the following cases is instructive.

Acceptance of Potential Claim by Insurer

In Chatz v. National Union Fire Insurance Company of Pittsburgh, PA, 372 B.R. 368 (N.D. Ill. 2007), the directors & officers ("D&O") insurance policy in question stated that if the Insured became aware of "any circumstances which may reasonably be expected to give rise to a Claim being made against the Insureds and shall give written notice to the Insurer of the circumstances and the reasons for anticipating such a Claim, with full particulars as to the dates, persons and entities involved..." The Insured sent a notice to its D&O insurer stating, in pertinent part, "...we are putting you on notice of potential claims against the Company. The Company is contemplating the filing of a Chapter 11 bankruptcy petition and believes that such filing will give rise to claims being filed against the Company, its Board and Officers. We will advise you of the specifics of the claims as the Company becomes aware of them." The insurer refused to accept this as notice stating that it lacked the specificity clearly required by the policy. Performing a thorough analysis of each detail required by the policy for the notice of Potential Claim, the Court in Chatz sided with the insurer, stating that the express requirements of the policy made clear that the Insured could not satisfy the notice requirement with "vague and general catchall statements about possible claims..."

In McCullough v. Fidelity and Deposit Co., 2 F.3d 110 (5 th Cir. 1993), the insurance policy in question required that any notice of a Potential Claim include notice of "any act, error, or omission which may subsequently give rise to a claim being made against Directors and Officers, or any of them, for a specified Wrongful Act..." The insured bank had, at one time, submitted both its call reports, as well as its annual report which included a footnote reference to a cease and desist order. When the FDIC sued the bank's directors and officers, the insured bank stated that its call reports and the reference to a cease and desist in the annual report, both of which clearly affirmed the bank's deteriorating financial condition, constituted notice of a Potential Claim under its D&O policy. The insurer denied coverage, stating that whatever notice had been given by the bank did not contain the specificity clearly required by the D&O policy. The Fifth Circuit found in favor of the insurer, stating that because the insured failed to give notice of a " specified Wrongful Act" as required by the insurance policy, the notice was insufficient to qualify as a Potential Claim.

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[1]The capitalized terms in this article are typically defined terms under claims made insurance policies. It should be noted that these definitions, along with many other terms and conditions of claims made policies, can vary depending on the specific insurer's form and the negotiated amendments to that form.

[2]Many claims made policies require the insured to provide notice of a Claim "as soon as practicable."

[3]While many claims made policies will require that a Potential Claim be reported with a certain degree of specificity, the required specificity and the policy language can vary widely from insurer to insurer.