It’s a common dilemma—whether to report an incident as a potential claim to your professional liability carrier. This article provides guidance on what constitutes a potential claim, a law firm’s reporting obligation relative to one, and the mechanics of reporting.
What is a potential claim?
The standard varies slightly by policy, but, in general, a potential claim (sometimes also referred to as a “pre-claim” or “circumstance”) is an act or omission that might reasonably be expected to lead to a claim in the future. A claim is usually defined as a lawsuit or other demand for money or thing of value.
Most clear-cut acts of negligence qualify as a potential claim. Examples include missing a statute of limitations; not answering a complaint, dispositive motion, or requests for admission; dismissal for lack of prosecution; late filing of a Subchapter S election; or any consequential drafting error in an important document.
Where a lawyer handled a transaction that resulted in substantial litigation against a client, such as a securities issuance, some courts have held the lawyer should have anticipated a claim.
The same with a government investigation into a matter handled by the lawyer.
Any actual or alleged conflict of interest or other ethical lapse, especially one resulting in disqualification or sanction by a court, or a bar complaint, should usually be treated as a potential claim.
Express client criticism of your handling of a matter, whether written or oral, especially when made by replacement counsel after termination of the representation, should usually be treated as a potential claim.
(Note that a client grievance coupled with a demand for money or other thing of value usually qualifies as a claim, not a potential claim; a claim must always be promptly reported to the carrier.)
Do I have to report a potential claim?
It depends. Some policies require the reporting of a potential claim, while others do not.
The following is an example of policy language requiring the reporting of a potential claim: “If the Insured receives information of specific circumstances involving a particular person or entity that could reasonably be expected to result in a claim, the Insured shall notify the Company as soon as practicable.”
The following is an example of policy language that does not require the reporting of a potential claim: “If during the Policy Period, the Insured becomes aware of a Potential Claim and gives written notice to the Insurer of the specific act or omission, . . . then any Claim subsequently made or proceeding subsequently brought against the Insured arising out of such Potential Claim shall be deemed to have been made at the time such notice was received by the Insurer.”[1]
Such “if/then” phrasing without a “shall” command generally signals that reporting is optional.[2]
While reporting during the policy period may be optional, understand that you will almost certainly be required to disclose all potential claims on your next application.
What if I fail to report a potential claim when required to do so?
Pocketing a potential claim under a reporting policy risks forfeiting coverage for a subsequent claim. The grounds for denial are potentially threefold. First, you breached the reporting requirement that is a condition of coverage. Second, most reporting policies include a “prior knowledge” exclusion that extinguishes coverage for any unreported potential claims at year end. Third, if you did not disclose the incident on your last application, the insurer has a potential fraud defense to coverage.
Why report a potential claim if you do not have to?
First, non-reporting usually does not avoid a premium increase because you will most likely have to disclose the incident on your next application.
Second, when switching carriers, it is critical to report all potential claims to your old carrier before policy expiration. This is because your new policy almost certainly excludes coverage for potential claims arising under the old policy. Not reporting potential claims to the old carrier creates coverage gaps.
Third, reporting sometimes make sense to maximize coverage for a potential claim. A claim arising from a potential claim is treated as having been made in the year that the potential claim was reported. Reporting a potential claim in an otherwise claim-free year ensures the full per-claim limit for it. Delayed reporting could result in the claim combining with other claims in a later year, stressing your aggregate limit.
Fourth, if denied or dropping coverage, you should report all potential claims before policy expiration to trigger coverage for a subsequent claim.
What is “laundry listing”?
“Laundry listing” is the frowned-upon practice of reporting everything under the sun as a potential claim under your expiring policy before switching carriers, usually in a highly general way (e.g., “potential claims from ABC Corp. securities issuance”). Do not do this.
First, whatever you list as a potential claim has to be disclosed on your application with the new carrier, likely increasing premiums.
Second, if the circumstance does not rise to the level of a potential claim, reporting will not trigger coverage for it under the old policy, but will trigger the prior-notice exclusion in your new policy, thereby creating a coverage gap.
Note that the potential-claim reporting provision in your policy requires a highly particularized description. High-altitude, abbreviated descriptions do not suffice. Failing to provide sufficient detail could result in a loss of coverage.
Should I buy a reporting or non-reporting policy?
Non-reporting if possible.
A reporting policy requires everyone to constantly evaluate whether an adverse development in any matter qualifies as a potential claim and promptly report it if so. A significant delay could forfeit coverage. This is a dark cloud to practice under.
Such risk is avoided under a non-reporting policy. Your only obligation is to disclose potential claims once a year at renewal. What you thought at mid-year might be a potential claim may resolve by year end. You only have to browbeat attorneys in the firm to disclose any mistakes once a year. Last, it is significantly harder for an insurer to deny coverage for non-disclosure of a potential claim in an application than it is for failure to report a potential claim under a reporting policy.
Does disclosing a potential claim on a renewal application qualify as reporting it?
Maybe, but do not count on it. Conceptually disclosure and reporting are different things. If you want to trigger coverage for a potential claim, best practice is to separately and formally report it as such in accordance with the reporting provision in the policy.
How do I report a potential claim?
Carefully follow the reporting instructions in the policy. The potential claim must normally be reported in writing. The report must include the required details and be sent to an address specified in the policy (if none is specified, check the insurer’s website or call your broker). Follow up with the insurer afterwards to make sure the report was received.
[1] See 4 William E. Wright, Jr., Law and Practice of Insurance Coverage Litigation, Claims Handling—Notice of Claim § 49:17 (Westlaw, June 2019 Update) (“All professional liability policies require the insured to give prompt notice of ‘Claims’ as defined in the policy. In most cases there is no obligation to report ‘potential claims,’ that is, an awareness of circumstances which may give rise to a claim. However, in the event an insured gives notice of a potential claim during a policy period, a claim subsequently filed will be considered as having been first made during that policy period.”); William E. Knepper & Dan A. Bailey, Liability of Corporate Officers and Directors § 24.08 (7th ed. 2003) (“D&O policies allow (but do not require) the insured to give notice of that potential Claim to the insurer during the policy period.”).
[2] Besides the reporting provision in the policy, you should also read the policy’s endorsements; sometimes the reporting provision in the body of the policy is modified by endorsement. You should also review any materials sent with the policy. Sometimes a non-reporting policy comes with a notice stating that potential claims must be reported.