Why Notifying Insurers Of Claims Is Almost Always The Right Decision
In a “hard market” many brokers and risk managers suggest that policyholders would be better off not giving notice to their insurers of claims, even if they are potentially covered, so as to avoid higher renewal costs. There are a number of problems with this approach. Five concerns are addressed hereafter.
First, if the policy has a “voluntary payments” provision, the failure to provide notice will bar recovery of pre-notice attorneys’ fees and may preclude a right to recover any policy benefits if the notice is delayed until trial is imminent This result may attend even in the majority of jurisdictions that require an insurer to prove prejudice to avoid policy benefits. If the policy is “claims made” (i.e., E&O/D&O) as opposed to “occurrence” based (i.e., CGL/Umbrella), the failure to provide notice of ongoing litigation during the policy period could impact the ability to obtain any coverage.
Second, in the event that the suit leads to a damages award or a sizeable settlement, and these exposures are not covered by insurance because no proper or timely notice was given, such a corporate loss could create a basis for a shareholders’ derivative action against the corporation for “waste” of the insurance policy asset.
Third, many insurers learn about ongoing litigation because it is reported on 10Q or 10K forms filed by the corporation as public records or because all outstanding litigation is reported in D&O renewal applications. Many insurers will already have taken these claims into account and adjusted insurance premiums accordingly. Thus, policyholders will suffer the consequences of reported litigation without obtaining any of the policy benefits which prompt notice would have secured.
Fourth, insurers typically assert that they want notice of all litigation against the company to better assess its risk profile. Brokers and risk managers who suggest that notice to the carrier will raise rates are often speculating. A loss, not a mere claim, is the event typically tracked by most insurers in fixing higher premiums. A risk manager would be hard pressed in a “waste” action to explain why it believed premiums would be higher where there is no tangible evidence that such would be the case. Reliance on a broker’s oral statements to that effect, where that broker did not investigate to see precisely what premium increases would have arisen if notice were provided, is not competent evidence. Even favorable testimony from the broker as to its reasonable expectation that higher premiums would result may provide little comfort to such a corporate policyholder, especially where more diligent inquiry would have revealed even broader replacement insurance coverage at an equivalent or even more favorable price point.
Fifth, in virtually every case, the recoupment of significant fees incurred in intellectual property/antitrust/unfair competition actions significantly outweighs the premium costs that may arise from procuring insurance to cover future claims.
For these and other reasons, unless the policyholder has only one insurance market where it can procure, on an “occurrence” basis, acceptable insurance coverage, there are rarely circumstances where the failure to give notice makes economic sense.
First, if the policy has a “voluntary payments” provision, the failure to provide notice will bar recovery of pre-notice attorneys’ fees and may preclude a right to recover any policy benefits if the notice is delayed until trial is imminent This result may attend even in the majority of jurisdictions that require an insurer to prove prejudice to avoid policy benefits. If the policy is “claims made” (i.e., E&O/D&O) as opposed to “occurrence” based (i.e., CGL/Umbrella), the failure to provide notice of ongoing litigation during the policy period could impact the ability to obtain any coverage.
Second, in the event that the suit leads to a damages award or a sizeable settlement, and these exposures are not covered by insurance because no proper or timely notice was given, such a corporate loss could create a basis for a shareholders’ derivative action against the corporation for “waste” of the insurance policy asset.
Third, many insurers learn about ongoing litigation because it is reported on 10Q or 10K forms filed by the corporation as public records or because all outstanding litigation is reported in D&O renewal applications. Many insurers will already have taken these claims into account and adjusted insurance premiums accordingly. Thus, policyholders will suffer the consequences of reported litigation without obtaining any of the policy benefits which prompt notice would have secured.
Fourth, insurers typically assert that they want notice of all litigation against the company to better assess its risk profile. Brokers and risk managers who suggest that notice to the carrier will raise rates are often speculating. A loss, not a mere claim, is the event typically tracked by most insurers in fixing higher premiums. A risk manager would be hard pressed in a “waste” action to explain why it believed premiums would be higher where there is no tangible evidence that such would be the case. Reliance on a broker’s oral statements to that effect, where that broker did not investigate to see precisely what premium increases would have arisen if notice were provided, is not competent evidence. Even favorable testimony from the broker as to its reasonable expectation that higher premiums would result may provide little comfort to such a corporate policyholder, especially where more diligent inquiry would have revealed even broader replacement insurance coverage at an equivalent or even more favorable price point.
Fifth, in virtually every case, the recoupment of significant fees incurred in intellectual property/antitrust/unfair competition actions significantly outweighs the premium costs that may arise from procuring insurance to cover future claims.
For these and other reasons, unless the policyholder has only one insurance market where it can procure, on an “occurrence” basis, acceptable insurance coverage, there are rarely circumstances where the failure to give notice makes economic sense.
