By Dominic Nesbitt
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Millions of dollars in insurance policy benefits are likely forfeited each
year by policyholders who fail to tender third-party claims in a timely manner.
It cannot be over-emphasized how critical it is to tender a liability insurance
claim in a prompt and proper manner. Tendering is the first step in the
claims process and one taken far too lightly by many policyholders. Simply
stated, a failure timely to report a liability claim in accordance with
a policy’s terms and conditions could result in a complete forfeiture
of coverage.
Set forth below are several steps a policyholder should take to ensure
a liability claim is properly reported under all potentially triggered
insurance policies.
1.
Do Not Delay
When a policyholder receives any third-party claim or lawsuit, the following
question should be asked:
“Might this be covered by insurance?” The claim or lawsuit should be immediately evaluated for insurance coverage
and tendered under any policy that is potentially triggered.
This need for immediate action holds particularly true with “claims-made-
and-reported” policies, such as most Directors & Officers, Professional
Liability, and Employment Practices Liability policies. These policies
require, as a condition of coverage, that a claim be reported to the insurer
during the policy period or within a short grace period thereafter. As such, even one day late in
tendering a claim beyond a claims-made-and-reported policy’s reporting
deadline will almost certainly result in the insurer issuing a denial
of coverage. Murphy’s Law being what it is, that deadline could
be only days after the claim is made, or perhaps just hours.
See, e.g., Root v. American Equity Specialty Ins. Co., 130 Cal. App. 4th 926 (2005) (attorney sued by former client on the Thursday
before the Sunday on which the attorney’s claims-made policy expired).
Under an “occurrence” policy, such as a standard Commercial
General Liability (“CGL”) policy, the consequences of delaying
tender may be less severe. Under occurrence policies, pursuant to California
law, an insurer will have to demonstrate it was “substantially prejudiced”
by a delay in order to deny coverage on the ground of late notice.
See, e.g., Campbell v. Allstate Ins. Co., 60 Cal. 2d 303, 305-306 (1963). That said, even absent a showing of prejudice
by the insurer, a delay in tendering a claim under an occurrence policy
may still result in a partial loss of policy benefits. For example, an
insurer will not be responsible for any pre- tender defense fees and costs
voluntarily incurred by the insured.
See, e.g., Tradewinds Escrow v. Truck Ins. Exch., 97 Cal. App. 4th 704, 710-712 (2002).
2.
Identify The Types of Policies Potentially Triggered
Under California law, it is the factual allegations, and not the legal
theories of liability, that determine whether a liability policy is triggered
by a third-party claim or lawsuit.
See Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (2005). Therefore, a claim or lawsuit’s factual
allegations should be scrutinized to determine which liability policies
are potentially triggered. While this step may quickly rule out certain
policies, if there is any doubt about whether a particular policy may
be triggered, the best practice is to err on the side of tendering.
3.
Ascertain Which Policy Periods Are Potentially Implicated
An occurrence policy, such as a standard CGL policy, is triggered by the
occurrence of “bodily injury,” “property damage,”
or an “advertising or personal injury” offense which happens
during the policy period.
See Montrose Chem.
Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 655 (1995). So, for example, if a claim or lawsuit alleges
a “personal injury” offense (such as libel or slander) occurring
two years ago, the claim or lawsuit should be tendered under the occurrence
policy in effect when the defamation is alleged to have occurred. If a
claim or lawsuit alleges continuing injury or damage over a period of
time, then tenders should be made under all occurrence policies in effect
during the relevant time period.Montrose, supra.
An entirely different analysis applies to “claims-made” policies.
As the name suggests, a “claims-made” policy is triggered
by the making of a claim, not by the occurrence of the underlying injury
or damage.
See Pacific Employers Ins. Co. v. Superior Ct., 221 Cal. App. 3d 1348, 1356-1357 (1990). As such, the relevant claims-made
policy under which a tender should be made is the one in effect when the
claim was first made.
4.
Comply With Reporting Provisions
The next step is to review the policies’ reporting provisions, and
then comply with them to the letter. Whether expressly required by the
policy or not, to ensure the tender arrives promptly, it is good practice
where permissible to send the tender letter and accompanying documentation
by overnight mail using a tracking number as well as via email.
The tender should transmit a copy of the claim or suit, as well as any other evidence that may support a showing of potential coverage.
This is important because under California law, an insurer has a duty
to consider extrinsic evidence in evaluating its defense obligation.
See Scottsdale, supra, at 655 (duty to defend arises “[i]f any facts stated or fairly
inferable in the complaint,
or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy”).
5.
Additional Considerations
Excess policies, which also have notice requirements, should not be overlooked.
Excess policies provide additional limits, and Umbrella Excess policies
may even insure additional risks not covered by primary policies.
See Reserve Ins. Co. v. Pisciotta, 30 Cal. 3d 800, 812 (1982). Policyholders should also consider whether
they may qualify as an Additional Insured on anyone else’s policy.
If so, tenders should also be made under these additional policies.
To sum up, upon receipt of a third-party claim or lawsuit, tendering should
be attended to immediately and with great care. By following the steps
described above, policyholders will go a long way toward securing the
policy benefits to which they are entitled.