C L A I M D E N I E D April 2005 A publication of the Lowenstein Sandler Insurance Law Practice Group Five Frequent Claims Handling Mistakes That Brokers and Policyholders Must Avoid By Lynda A. Bennett, Esq. n recent years, the profile of increase in lawsuits being filed against Brokers must recognize, for example, I insurance brokers has risen brokers. A significant source of broker that a demand letter from a customer substantially because of headline- liability derives from the broker’s role and/or its attorneys may constitute a making events like the “occurrence” as claims manager for the policyholder. claim under the policy. Likewise, an dispute associated with the World Many brokers have been forced to take “invitation” to attend a “non-binding” Trade Center tragedy and Attorney on this responsibility to remain mediation session with the EEOC will General Elliot Spitzer’s investigation competitive in today’s complex likely trigger a notice obligation. into broker compensation and “bid- insurance market by offering “full Because courts nationally have rigging” issues. However, these events service” to their clientele. interpreted the notice provisions of are not the only reason for the notable Unfortunately, not all brokers claims made policies strictly, an error appreciate the pitfalls associated with in notice may forfeit coverage for an Inside navigating the claims process. This otherwise valid claim. Brokers must be Untimely Notice By a article highlights five common claims particularly careful in giving notice of a Matter of Hours Results in handling mistakes that expose brokers claim when a change in insurers has Forfeiture of Coverage to professional liability. been made on consecutive claims Under a Claims made policies. Far too frequently, the Made Policy 1. FAILURE TO NOTIFY THE broker decides to place the “wrong” CORRECT INSURER. Punitive Damages Are insurer on notice of the claim and by At the most basic level, a broker Available When Insurers the time the error is discovered, notice Employ Bad Faith Claims must know to send timely notice of a can no longer be given to the “right” Handling Practices claim to the right insurer during the insurer. correct policy period. Many new Directors and Officers policies are written on a claims made Moreover, even in the case of Denied Coverage Based on Pollution Exclusion basis with broad definitions of “claim” occurrence-based coverage, many and strict notice requirements. brokers overlook the scope of coverage This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only. A L D
3. FAILURE TO PAY implicated by a particular claim. For document their communications with ATTENTION TO DETAILS instance, when a policyholder is sued insurers about a claim. IN WRITTEN for property damage resulting from a An ancillary issue to this mistake is COMMUNICATIONS. defective product that was sold five the broker’s failure to provide written years ago, all of the policyholder’s Brokers often tend to overlook the advice regarding tail coverage for commercial general liability insurers legal implications that their claims claims made policies. Most from the date of sale to the date of the handling activities may have. For policyholders do not give much lawsuit should be placed on notice of example, brokers routinely identify a consideration to the availability and/or the claim. Many times, however, the “date of loss” in their notice letter that need for a “tail” until the period to broker places only the “current” is based on a cursory review of the purchase that coverage has lapsed, insurer on notice. The negative initial package of papers that the because they are relying on the broker implications of this decision are policyholder has provided. Again, to advise them on these issues. twofold. First, in jurisdictions that because of the strict reporting apply a “no prejudice” standard to a requirements contained in many One of the most important late notice defense, the broker may claims made policies, the “date of loss” lessons that should be have forfeited coverage under the assigned by the broker may turn into a learned from the World earlier, applicable policies. Second, in fatal “admission” regarding when the Trade Center coverage all jurisdictions, the broker has policyholder received first notice of a dispute is the importance jeopardized the ability to obtain full claim. Similarly, some brokers seek to of defining the broker’s recovery for defense costs incurred streamline the claims process by role vis-à-vis pursuing prior to notifying the relevant insurers. characterizing the facts of the case coverage in concert with Indeed, insurers routinely deny and/or the nature of the claim without the policyholder’s coverage coverage for “pre-tender” costs that counsel. giving consideration to how are incurred without their knowledge the insurer may use those or consent. characterizations to avoid coverage. However, once coverage is lost because In this regard, the adage “less is more” the tail was not placed, policyholders 2. FAILURE TO should be adopted as a best practice. and their coverage counsel typically COMMUNICATE IN WRITING. The broker should provide the insurer evaluate whether the broker failed to The single biggest mistake made by with the demand letter and/or the fulfill their obligation to fully and brokers today is providing oral notice adequately explain the coverage to the pleading received from the of a claim. As discussed above, timely policyholder. Brokers should employ policyholder and allow the insurer to notice is the touchstone to coverage the “best practice” of providing a draw its own conclusions and opinions. under all claims made policies and written explanation of the extended Thereafter, the insurer’s claims under occurrence-based policies reporting period, including the cost handler will frame the coverage issues, subject to a “no prejudice” standard. associated with purchasing the if any, and identify any additional Memories fade and personnel turnover additional coverage and highlighting information that is needed to make a is routine. Far too often, coverage the time frames within which decisions coverage determination. hangs in the balance of a “he said, she about the coverage must be made. said” determination. Rather than invite a lawsuit, brokers should always
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