Many contractors professional liability (CPrL) insurance claims are denied simply on the basis that the error, incident, and/or circumstance was reported after the date required within the insured's policy. As a result, CPrL insurance holders should be well-versed in all the facets of their policies, especially the ones that can negate claims and forfeit the insured's restitution rights.
That’s why it’s always best to report potential claims in writing, while also strictly adhering to the policy’s reporting guidelines. This will not only help prevent the denial of claims but also help to better engage the insurer and gain their assistance while trying to resolve any or all actionable issues.
Understanding Your Professional Liability Insurance
Never underestimate the policy's language. There's actually little wiggle room once the insured deviates from the insurer's specific reporting requirements. As a general rule, always do what the policy says. This includes thoroughly understanding the terms, conditions, enhancements, and exclusions stated within the specific policy type. That's because even similar policy agreements can vary among the numerous individual insurers.
For instance, here is a brief summary of the three coverage types available within today’s marketplace.
Professional liability. Covers the third-party claims and damages arising from the negligent acts, errors, and omissions resulting from the professional services performed by or on your organization's behalf (i.e., subcontractors or sub-design-professionals).
Rectification or mitigation (R/M). Unlike professional liability, R/M coverage pays for the first-party costs needed to remedy or "rectify" the design or engineering errors that are identified during the course of construction and would most likely lead to a liability claim against the insured. Never forget that the early reporting of such claims under this coverage is essential for ensuring the policy’s full coverage benefits.
Protective indemnity (PI). Like R/M, PI coverage is a first-party coverage. However, PI pays for the damages an organization incurs in excess of the hired design or engineering firm's professional liability insurance. In other words, the engineer's professional liability policy pays first, while the organization's PI coverage pays the difference between the total damages and the amount the designer or engineer's professional liability insurance is expected to pay.
However, each of the aforementioned coverage forms comes with its own set of separate triggers that will activate the insurance once the claims are made. And, again, they all include specific reporting provisions to ensure problems and/or challenges are reported on a timely basis. In fact, noncompliance with any of these provisions could and will most likely jeopardize the coverage and its award benefits.
Therefore, project managers and/or directors must clearly understand the fundamental differences between the three policy types when reporting an incident, circumstance, claim, or any other third-party concern. The surest way to preserve the integrity of claims is through strict accordance with their reporting requirements. That said, no insured should ever admit liability, accept fault, or settle any claim without the prior written consent of the insurer.
Organizational Reporting Structures
The duty to report claims to insurers oftentimes depends on the individual who first learned of the complaint. Many policies state that the insured is required to give the insurer notice of the claim as soon as it's learned by a representative of the insured. Depending on the policy's definition of "insured," this means a claim typically becomes reportable when any of the insured's employees learn of it.
However, this can create a problem when, for example, an on-site remote employee working within the insured's risk management department learns of a claim but fails to report it to their superiors. To avoid this scenario and to ensure incidents, circumstances, or claims are reported on a timely basis, each organization must have a detailed reporting structure in place that ensures the proper escalation of situations as they occur.
Identifying Circumstances That "Could Arise to Claim Status"
Most CPrL policies allow the reporting of circumstances that could potentially turn into claims at a later date. However, the process can vary greatly from policy to policy and even among the various insurers. So, in general, insureds should do the following.
Describe the event in as much detail as possible.
Always err on the side of reporting if the insurance form allows insureds to report a "circumstance" that may develop into a claim. And, if the circumstance develops into an actual claim, the insurer will typically agree that the original date of the notice will become the claim’s official notice date. Plus, don't forget that circumstance reports seldom need to be as detailed as claims reports.
Report everything known even if all the facts haven't been gathered. For instance, the initial report can state the issues in question are still under investigation, and the additional details should be presented within a given time frame.
Report the relevant details as soon as they become available, especially if the challenge is likely to turn into an actual claim.
Submit information that can include the following.
Communications that request the investigation of potential system or structural problems
Highlights surrounding the full or partial collapse of any portion of the work or structure
Descriptions of the full or partial collapse of any portion of the work or structure, system malfunctions, and client dissatisfaction issues
Faulty work claims that can lead to allegations of the insured failing to inspect work or manage subcontractors properly
Identifying the Actual Claim
Do you have a "claim" as identified by the policy or a mere complaint, disagreement, or dispute? At its most basic definition, a "claim" is a demand for money or services. Some policies also require the assertion of a legal right or that the claim is in writing or both.
Here are the basic steps that can be taken once a third-party customer expresses their dissatisfaction with the insured's services or demands restitution.
The demand for money or services. The meaning of this phrase can vary depending on the jurisdiction. But, as a best practice, the demand for restitution can generally be considered a reportable claim. And again, always err on the side of caution and report the issue as soon as it arises. In addition, the reporting details should also include information like the following.
Engineering errors identified
Expected demands for compensation by the project's owners
Samples of all written communications as well as graphics, calculations, and drawings
Potential claim and project challenge notifications and the acknowledgment of their receipt
The assertion of legal rights. Some courts have held that the threat of a suit embeds within the demand for payment. The third-party claimant may also assert that their legal rights were violated during the performance of the services enacted on their behalf. In any event, any time that a communication threatens legal action, the insured should always consider the act as a reportable claim.
Document and archive everything, including all the written materials. CPrL policies frequently require that written demands made against a policyholder should be considered claims. "Writing" includes letters, handwritten notes, tweets, emails, and text messages. Although a formal letter is the best practice for making a claim, insureds should archive all of the written material that references a demand or alleges the legal rights of the aggrieved party. Samples of actual claims events may include but are not limited to the following.
Formal lawsuits or complaints served directly to the insured
Notices of injury or damages resulting from the insured's work
The demands of owners to correct or rectify any portion of the insured's work
When To Report the Claim
Nearly every policy will provide the necessary claims reporting details. This often includes the instructions for notifying insurers within a specific time frame or "as soon as it's practicable." For instance, if the policy references a specific time frame, that time (usually 30 or 60 days) will typically begin on the date the insured learned of the claim.
However, if it's stated that the claim should be reported "as soon as practicable," then the insured should never delay reporting the claim as soon as it becomes known. This includes the reporting of all relevant known information.
In contrast, unreasonable reporting delays are normally only excused if the insured can demonstrate that they lacked the necessary claim knowledge or had a reasonable belief of nonliability.
Furthermore, insureds should always be aware of the policy's coverage period, especially if the policy is likely to be renewed with another insurer. That's because the coverage could include an "extended reporting period" that allows the insured to report claims within a certain period of time—typically 30 to 60 days—following the policy's end period. But again, insureds should always report the challenge as soon as the event has been identified, while never relying on the extended reporting period.
As for the renewal of the CPrL program, it is also always prudent to survey the appropriate personnel within the organization to determine the time line of when the company personnel were aware of the claims, potential claims, or circumstances made before the program's renewal.
What To Include in the Notice of Claims
As a general rule, insureds should always include the following.
Specific information as required by the policy. If any required information is not known, indicate as much in the notice and provide the additional information as soon as it's available.
Identities of everyone involved in the claim.
Information that details what, where, when, and how the event happened, as well as any associated correspondences (emails, letters, complaints, etc.).
Special Considerations for Protective Indemnity and R/M Claims
Protective Indemnity Claims
The recovery process under this coverage part typically requires the policyholder to make a claim against the design professional. A notice to the insurer of the loss, by itself, is typically insufficient.
To recover under the CPrL's protective indemnity coverage, depending on the specific wording of the policy, it is oftentimes advisable to do the following.
Make a written demand, demand arbitration or mediation, and/or file suit against the at-fault design professional. Typically, insureds must then make their claims against the at-fault design professional before the end of the policy period or the policy's optional extended reporting period.
Keep in mind that insureds may not need to file a lawsuit to perfect a protective indemnity claim. According to the policy's terms and conditions, it may be sufficient enough to simply make a written demand of the at-fault design professional.
As with protective indemnity claims, the negligent acts or omissions against which the claim is made must typically arise from the professional services rendered after the policy's retroactive date and before the end of the policy period. To recover under the insured's CPrL policy's R/M coverage, depending on the specific wording of the policy, it is oftentimes advisable to do the following.
Report the incident to the insurer in writing as soon as it's discovered. This can include any circumstance that can be reasonably expected to lead to a professional rectification claim. For example, during the installation of an HVAC system at a commercial office building, it was discovered that certain floors were not cooling properly. A further investigation determined that engineering errors related to the size of the system and ventilation network retarded the building's airflow in certain areas. R/M errors like these must be reported to the insurer prior to any resolution attempt.
Detail the proposed action to the insurer in writing.
Demonstrate to the insurer in writing the reasonableness and necessity of the proposed cost of the mitigation in light of the projected benefit of avoiding a covered third-party claim.
Await the insurer's approval before moving forward, and obtain the insurer's consent to the mitigation strategy before incurring any actual mitigation costs.
So, there it is. The basics of reporting CPrL claims in a nutshell.
Nevertheless, these are only suggestions and insureds should never depart from the policy's official guidelines. The claim reporting process does not have to be filled with a series of tedious, dramatic events. But it can be if the proper steps aren't taken once an incident occurs and the organization's representatives fail to adhere to the appropriate reporting processes and procedures.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.