If properly reported to insurance companies, your professional liability policies cover you for claims made against you for errors and omissions in your practice of law. While most claims are reported when you first are put on notice of an impending lawsuit, other times it is appropriate to report a claim when a circumstance arises that you think can rise to a claim in the future. Your obligation to report potential claims are both in your policy as a requirement as well as listed in your annual application. You must disclose to the insurer events also called “circumstances” that can reasonably become a claim. Common examples can be – mistakes that occurred in the handling of the matter, a lost calendar matter, or an irate client that seems convinced that errors were made in your legal work, etc.
Since insurance companies use reports of potential claims in their underwriting matrix to determine annual premiums, it is common for managing partners to weigh if they should report these events or wait until something more concrete like an actual lawsuit develops to report the claim to their insurer. The logical justification is that since in most instances “circumstances” do not result in a claim, there is no need to report it until you know for sure.
This is a flawed argument and it imperils your firm and your future financial health. The real truth is that even if you are comfortable that this actual “circumstance” won’t mature into a full blown claim, an insurance company may use your lack of timely reporting of the event to either disclaim coverage on this particular claim or catastrophically attempt to void your policy when you seek coverage on a far larger unrelated claim, citing this mistake as evidence that you completed an untruthful application.
Do not give the insurance company an excuse for denying your claims. We have seen it happen and it is a difficult position to overcome. The only way to conservatively run your firm is to report potential claims to your insurer. It is 100% true that reporting potential claims can cause your premiums to rise. Our experience is that a firm that reports potential claims can pay as much as 10% higher compared to one that reports no potential claims. The 10% penalty however is far better than risking the coverage when you need it most – for the multi-million dollar claim. When in doubt – discuss with your broker AND report.