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.