Chronic lateness may be a societal problem, as many etiquette columnists note*, but when it comes to insurance claims, lateness in notifying one’s insurers invites more than dirty looks – it can bring denial of coverage.
Insurance policies almost universally specify timely notice of claims as a condition of coverage, though the language describing timeliness can be vague. Common phrases in policies include “prompt notification,” “as soon as possible,” and “as soon as practicable.” Translating those words into days, weeks or months can largely depend on the circumstances of the claim.
Some claims take longer to develop than others, and it may be difficult for insureds to know early on whether an incident will exceed its deductible or self-insured retention. For excess layers, claims can be even harder to predict.
CLAIMS VOLATILITY HIGH
Rising volatility in the size of losses over the past several years is causing excess insurers to take a greater interest in the lower layers. Naturally, they are eager to know if claims will exhaust the primary limits and, if so, how high will they go in an excess tower.
Multimillion-dollar jury verdicts in various plaintiff-friendly venues are not only penetrating higher coverage layers; they essentially are creating a new floor for settlement offers. For example, a lawsuit that might have settled for $500,000 a few years ago has inflated to several million. Verdicts in the tens of millions of dollars are becoming more frequent, particularly in commercial auto and excess trucking.2
Claim severity across multiple lines of casualty business has grown to the point that excess insurers have been sharply raising rates, reducing their capacity and, in some cases, exiting classes of business.3 The insurers that remain are wary about claims further eroding their profitability. As current market conditions continue to harden – due to years of under-performance and in response to emerging risks such as the coronavirus – insurers may take a more aggressive stance on late notification.
HOW COURTS HAVE RULED
Courts across the United States have issued mixed rulings on late notice of claims and whether the burden of proof rests with insurers or insureds. If there is any common thread in insurance coverage case law, it’s that courts generally do not like to see insurers deny coverage.4
The argument over late notification hinges on the issue of whether the delay prejudiced the insurer’s actions. In other words, if the insurer had timely notice, could it have taken actions to minimize the insured’s liability? A federal court in Texas examined several different cases in creating a three-factor test for determining whether an insurer was prejudiced by late notice:
- What rights did the insurer have under the policy and were those rights lost by the insured’s untimely notice?
- Did the insurer produce evidence that it would have exercised those rights?
- Did the insurer demonstrate as fact that its actions would have affected the outcome of the lawsuit?
Such a test sets a relatively high bar for insurers to prove that late notification of claims prejudiced them. But it’s important to note that courts generally apply this reasoning to occurrence policy forms, not to claims-made or claims-made-and-reported policies. The reason is straightforward: Claims-made policy forms typically require that notification occur during the policy period, or a specified number of days after expiration, such as an extended reporting period. Occurrence forms, on the other hand, may respond to claims filed outside of the policy period.
Regardless of the policy form, it’s obviously better for insureds to have coverage than not. For this reason, insurance laws traditionally have considered the duty to defend as broader than the duty to indemnify insureds.
RESERVATION OF RIGHTS VS. DENIALS
In general, an insurance company that has doubts or concerns about a claim will issue either an outright coverage denial or a reservation of rights (ROR) letter. Although many insureds might view them as nearly the same, they are quite different.
Insurance carriers have a legal obligation to promptly determine if there is coverage and advise the insured so that the insured can manage and resolve the claim, with or without the insurer’s involvement. If an insurer does not assert its coverage position on a claim, it may be presumed to have waived its right to do so. With a coverage denial, the insurer gives up any control it might have had over the claim.
With a ROR, on the other hand, the insurer can maintain control of the claim. The ROR is a short-term mechanism to avoid waiving the right to assert a coverage position while the insurer investigates the facts surrounding the claim. RORs are a formal way of asserting the insurer may limit, or even deny, coverage pending further investigation, or perhaps even defense, of the claim.
RORs can benefit both insurers and insureds. Insurance companies may use the ROR to negotiate a reduced contribution. By the same token, brokers often push carriers to issue RORs so insureds can seek contributions to settling the claim. A coverage denial removes the possibility of an insurer contributing to settlement, while the ROR leaves open that possibility. In nearly all cases, even after issuing a reservation of rights, insurers have contributed to settlements.
DO’S AND DON’TS
Even though a longstanding principle in insurance law is to construe ambiguity in favor of the insured, policyholders should consider the following tips. Some do’s and don’ts are:
Do take the time to understand your policy. Every policy is a legally binding contract, and insureds should know what their responsibilities are.
Do talk with your insurers before you experience a claim. Many coverage disputes could be avoided if insurers and insureds established clear communications and expectations before a claim is ever filed. Some insurers like to hear about every claim no matter how small, while others only want to know about those claims that might exceed a certain threshold.
Do consult with experts. Whenever you become aware of an incident that could generate a claim, it’s prudent to discuss the situation with specialists in law and insurance. A rule of thumb is to notify insurers if a claim reaches 50% or more of the deductible or self-insured retention.
Don’t unreasonably delay notification. A reasonable amount of time straddles the extremes of immediate notification after an event and delivering notice on the courthouse steps. Insureds should not wait to notify their insurers. Timely notice can enable insurers to assist in mitigating the claim and preparing a strong defense.
Don’t expect excess insurers to follow the primary form. Historically, excess insurers used to follow the form of the primary coverage, including its terms and conditions. Now, excess insurers are more likely to follow their own forms, which may differ significantly from the underlying layers.
Don’t view RORs as equivalent to coverage denials. Excess insurers may issue RORs to preserve their ability to contribute a lesser amount to settle a claim based upon the existence of coverage issues, but will typically still contribute to any settlement that reaches their layer of coverage.
Excess insurers differ in their approach to claim notification. Some like to know about all claim activity in the underlying layers, while others only wish to know about claims that might penetrate the layers they write. Because it can be difficult know when and under what circumstances to notify excess insurers, it’s best to discuss claims with a wholesale specialist. In general, excess carriers are paying more attention to claim trends. Volatility in claims makes it prudent to consider notification as early as practicable, definitely not late in the game. Issuing notification while heading to trial is a good way to get a claim denial. Late notice of claims doesn’t help insurers provide better coverage or mitigate losses, so it doesn't benefit insureds, either.
For more information, please contact your CRC Group producer.
- David Gilfillan is the Chief Claims Officer at CRC Group, leading the firm’s Claims Advocacy Team.
- “Chronic Lateness Is Just Plain Rude,” Dear Abby by Abigail Van Buren, 2015; https://www.uexpress.com/dearabby/2015/8/14/ex-friend-takes-womans-place-at-holiday
- “2020 State of the Market at a Glance: Casualty,” CRC Group; https://www.crcgroup.com/Portals/34/Flyers/Tools-Intel/2020_SOTM_Casualty.pdf?ver=2020-03-16-103657-233
- “State of the Market: Directors’ and Officers’ Liability,” CRC Group, October 2019; https://www.crcgroup.com/Tools-Intel/post/state-of-the-market-directors-officers-liability
- “Please Excuse the Delay: The Consequences of Untimely Notice, Slow Investigation, and the Failure to Communicate,” J. James Cooper, Jordan J. La Raia, Terrance J. Evans, Katherine E. Mast, and Miles C. Holden, American Bar Association Section of Litigation Insurance Coverage Litigation Committee CLE Seminar, 2012; https://www.duanemorris.com/articles/static/evans_abainsurance_0312.pdf