When Does a Professional Liability “Claim” Arise?

Professional liability insurance policies cover professionals for claims arising within the agreed upon policy period. At first blush this appears to be a relatively simple concept but there is plenty of room for confusion which can result in a lack of coverage. What is a claim? The fact that a lawsuit was filed within a policy period does not necessarily mean that the “claim” giving rise to the lawsuit is covered under a PL policy. A perfect example of this issue was presented to the court earlier this month in Regency Title Co. v. Westchester Fire Ins., (E.D. Tex. Nov. 15, 2013) during which the USDC for the Eastern District of Texas considered the date on which a claim arises for purposes of triggering coverage.

In Regency, the insured purchased a PL policy that provided coverage for “claims made and reported” during the policy period (9/1/09 – 9/1/10). The insured was sued within that period for negligence, breach of contract, and other causes of action. When the insured promptly notified its PL carrier of the lawsuit, the carrier refused coverage. According to the carrier, although the underlying lawsuit was filed within the policy period, the “claim” giving rise to coverage was triggered one year earlier when the underlying plaintiff filed a grievance against the insured with the Texas Department of Insurance.

The insured filed a petition seeking coverage. The district court considered the definition of a “claim” within the insurance policy, which included “a written demand against any Insured” and “a civil, administrative, or regulatory investigation against any Insured.” Based on these definitions, the court held that the initial complaint filed with the Department of Insurance constituted a “claim” within the meaning of the policy. Because this complaint was filed before the start of the policy period, the court ruled that the insured was not entitled to coverage.

There are several lessons here. First, read your policy! In selecting a PL policy, professionals should be sure to determine what claims are covered and should consider whether any preexisting complaints could be included within the definition. Further, professionals should inform their carrier or broker at the first sign of pending or threatened litigation or similar proceedings. Failure to notify a carrier of a claim within the policy period could mean a loss of coverage and personal liability for the insured.

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  1. I recently heard of a similar situation where the insured tried to file the claim but was denied for filing it too long after the insured had become aware of the potential claim. It is also common in professional liability policies to have an “insuring agreement” that requires the insured notify the insurance company within a reasonable time from when they become aware of the potential claim situation. In this particular situation the insured had a disgruntled client file a complain with the regulatory board of the profession the insured worked in. The regulatory board decided in favor of the insured so the disgruntled client then decided to file a claim. This was several months later which gave the insurance company grounds to deny the claim even though it was all still within the retroactive date and the expiration date of the insured’s policy.

  2. Curiosity Seth. Was anything about the complaint to the Dept of Insurance mentioned on the professional liability application? I assume Regency was uninsured when the 9/09 policy was purchased. If not, the prior carrier clearly should have been notified when the insured was notified of the Texas Dept of Insurance complaint.

    • Thank you for your question, Dan. The decision doesn’t discuss this issue in detail. It appears that Regency only notified its carrier when the lawsuit was filed. Regency did not mention the Dept. of Insurance complaint at the time of its PL application.

  3. I’ve often said the most dangerous time for an Insured (and their brokers) is at or around renewal. The frequency of claims “falling through the cracks”, despite contiguous coverage with no gaps over the years, is increasing due to Gotchya’s , and language that is non- conforming or substandard. Most Appellate decisions define a “claim” as being a demand for money or services. Few, if any claims made polices are so simple, and instead define what is a claim in the definition section of the policy, something that must be reviewed carefully and coordinated with Extended Reporting provisions, Insuring Agreements and “Duties in Event of Claim” reporting conditions.

    The consequences of inconsistent or uncertain language can be devastating for the Insured and , of course their broker. Consider a definition of “Claim” section that doesn’t; require “receipt by the Insured” , yet it is a claims made and reported form. How does one report a “claim” they don’t know about- especially if the Auto ERP only applies if the policy is non-renewed or canceled. What if it renews ? One need only to read James River Ins v. Garcia to see how that turned out (856 F.Supp.2d 1284 (2012).

    In 2009 ( and re-republished in 2010), the Insurance Journal ran a 5 part series on the Claims Made form I wrote (available at http://e-o.com/Media/135%20Part%20Claims%20Made%20Series.pdf ) . In that article, I cited several different definitions of “claim”, such as:

    * Claim means:

    a) a written demand for monetary damages or non-monetary relief,
    b) a civil or criminal adjudicatory proceeding or arbitration,
    c) a formal administrative or regulatory adjudicatory proceeding, or
    d) a formal civil, criminal, administrative or regulatory investigation, against an Insured
    Person, including any appeal therefrom.

    * Claim means:

    1. a written demand or request for monetary damages or non-monetary relief against any of the insureds, or to toll or waive a statute of limitations;

    1. a civil, criminal, administrative, investigative or regulatory proceeding initiated against any of the Insureds, including any proceeding before the Equal Employment Opportunity

    Commission or any similar federal, state or local governmental body, commenced by:
    a. the service of a complaint or similar pleading;
    b. the filing of a notice of charges, investigative order or similar document; or
    c. written notice or subpoena from an investigatory authority identifying such Insured as an
    entity or person against whom a formal proceeding may be commenced;
    1. in the context of an audit conducted by the Office of Federal Contract Compliance

    Programs, a Notice of Violation or Order to Show Cause; or
    1. an arbitration or mediation or other alternative dispute resolution proceeding if the Insured Organization is obligated to participate in such proceeding or if the Insured Organization agrees to participate in such proceeding with Underwriters’ prior written consent, such consent not to be unreasonably withheld.”

    * “Claim” means a demand received by any Insured for money or services including the service of suit or institution of arbitration proceedings. “Claim” shall also mean a threat or initiation of a suit seeking injunctive relief…”

    * “Claim” means a demand for money or services naming the Insured arising out of an act or omission in the performance of professional services. A claim also includes the service of suit or the institution of an arbitration proceeding against the Insured.

    In essence, when a claim MUST be reported will be based on the definition(s) of “Claim” and when to report and how to report it according to the conditions in the form. Caveat Emptor indeed- not to mention Caveat Broker.

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