The Pitfalls of "Claims Made and Reported" Lawyers Professional Liability Insurance
Virtually every lawyer's professional liability insurance policy being sold today is written on a "claims made and reported" basis. Of what importance is this to the average practitioner? Most pay little attention until after a client actually makes a claim - and by then it can be too late. But with a little planning, and armed with a basic primer on the pitfalls of the "claims made and reported" provisions in the firm's liability policy, many attorneys can strategically avoid the most common coverage issues that arrive with the filing of a legal malpractice action. "Claims made" policies differ from "occurrence" policies (typically, of the general liability variety) in that the trigger of coverage is not the happening of a covered event, but rather the making of a "claim" (usually the filing and service of a lawsuit or a written demand for money or services) arising from a "wrongful act" (often defined as an "act, error or omission in the provision of professional services") against the insured. The actual error may have happened years before. Under a typical "claims made and reported" provision ("[w]e will pay on behalf of the 'Insured' those sums in excess of the deductible that the 'Insured' becomes legally obligated to pay as 'Damages' and 'Claims Expenses' because of a 'Claim' first made against the 'Insured' and reported to us in writing during the 'Policy Period"'), the insurer adds the condition precedent that the "claim" must not only be "made" during the "policy period," but must also be reported in writing directly to the insurer during the policy period as well. Unlike an "occurrence" policy, the "claims made and reported" policy provides the insurer with a finite risk, because once the policy expires, the risk ends. This results (ideally) in lower premiums for the professional - but also a trap for the unwary. The most common problem with "claims made and reported" coverage arises when a lawyer commits an error but believes that it can be "fixed," or that the client will not make a "claim," and therefore fails to report it to the insurer, often with the belief that the reporting of a potential claim will result in significantly higher premium. Most lawyers professional liability ("LPL") policies contain exclusions for "claims" arising from circumstances before the policy period that the lawyer knew or should have known might result in a claim. The rationale for such an exclusion is easy to understand: it prevents an attorney from committing an error, recognizing the risk, and then purchasing insurance to cover it. In today's relatively soft LPL insurance market, while the reporting of a potential claim certainly has underwriting significance, the risk of not reporting it can have devastating consequences. Lawyer insureds are often under the misconception that if they maintain continuous coverage with a single insurer; they need not worry about whether a potential "claim" gets reported to their professionalliability carrier during the policy period in which the error occurs. However; unless the policy contains a continuous coverage clause (e.g. "if any Insured gives written notice of a Claim to the Company during the current Policy Period, or during the Policy Period of any subsequent policy issued to the Named Insured as a result of continuous and uninterrupted coverage with the Company, any Claim subsequently made against any Insured shall be considered to have been first made during the Policy Period the Insured first became aware of a Potential Claim"), the law treats each policy, regardless of how many times it is renewed, as a self contained unit. (See A.B.S. Clothing Collection, Inc. v. Home Ins. Co. (1995) 34 Cal.App.4th 1470, 1476-78 [41 Cal.Rptr.2d 1667] [the renewal of an insurance policy constitutes a separate and distinct contract for the period of time covered by the renewal and is not a continuous contract "unless there is clear and unambiguous language showing the parties intended to enter into one continuous contract.").Therefore, waiting for a policy to renew before reporting a potential claim can again result in a forfeiture of coverage. There are several ways to avoid this potential problem. One is to obtain a policy with a continuous coverage clause like the one cited above, but such policies are often only issued to large law firms or those with huge deductibles. A more common solution is to shop around for a policy which contains an extended reporting period that applies to renewals (e.g., one with an insuring agreement which expressly allows the reporting of claims within 60 or 90 days of the expiration of the policy period, regardless of whether the prior policy was with the same carrier). That way, if a potential claim comes in near the end of the policy period, at least the practitioner has some time to determine whether the "claim" has any merit without jeopardizing the renewal. Attorneys are cautioned, however, that such clauses are, by and large, strictly construed by the courts, and absent extenuating circumstances (such as the last reporting day being a weekend or holiday, or other circumstances in which the insured may be equitably excused from timely reporting a claim) even a single day's tardiness will result in the forfeiture of coverage. Another common pitfall of "claims made" coverage is changing carriers, which can have the unintended effect of creating a "hole" in coverage. Since "claims made and reported" policies are driven by the date a claim is made, and not the date the error occurred, when issuing new policies insurers protect themselves from risk by adding a "retroactive date" to the policy, usually as of the date of inception. This means that not only does the "claim" have to be "made" during the policy period, it also must arise from an "act, error or omission" which occurs after the date of inception. At least for the first year, such coverage affords little protection to an attorney who has been in practice for a number of years, because it will not cover a claim arising from "professional services" rendered prior to the policy period. The solution? Ask your insurance professional if "prior acts" or "nose" coverage is available. Often, an insured with no claims history can obtain a new policy with a "retroactive date" going back a number of years which will cover professional services rendered in the past that have yet to ripen into a "claim" or even a "potential claim." Purchase of such "nose" coverage is especially important if the expiring policy was also of the "claims made and reported" variety (as almost all LPL policies are) because once the expiring policy period ends a new "claim" is not reportable under the old policy unless an extended reporting period (or "tail") coverage is purchased from the prior insurer. Often, because the new carrier wants your business, the purchase of "nose" coverage is cheaper than "tail" coverage on the old policy (a one-year reporting tail can be as much as 200 percent of the expiring premium or more). Nevertheless, where "nose" coverage is not available, the risk-averse attorney will purchase a "tail" to cover unknown claims. How much "nose" or "tail" coverage to buy depends on the nature of the practice. An estate planning attorney may need full prior acts coverage if possible, because many years may elapse between the drafting of a will, the client's demise and the ultimate challenge by the beneficiaries. On the other hand, a personal injury attorney may not need more than two years of "nose" coverage because of the relatively fast turnover of clients in his or her office. "Tail" coverage is also beneficial to attorneys who are retiring or selling their practice and have no need for continuing coverage. These are but a few examples of the common coverage issues which arise in the world of "claims made and reported" insurance policies. The best way to protect oneself is to take a conservative approach to reporting potential claims and maintaining a spotless record. However, with a little planning and the earnest counsel of a trusted insurance advisor, most of these problems can be avoided.