Not reporting property insurance small claims makes sense. With a property claim you generally know with great certainty the amount of damages quickly. If the property claim is below or right around your property claims deductible, then handle the claim. Problem with attorney malpractice claims is that a ‘small’ claim might not stay small, but more importantly it violates the terms of your malpractice insurance policy.
Law firms reluctant to report small malpractice claims feeling that a small legal malpractice claim the firm can cover it themselves. This strategy does help the firm’s insurance history thus keeping their attorney malpractice insurance premiums low. But this strategy can cause a law firm to lose their malpractice coverage.
Non-reporting of attorney malpractice claims likely violates the policy conditions. This violation can have consequences.
The following is typical wording of requirements in an attorney malpractice insurance policy for reporting claims:
7.1. NOTICE OF CLAIM
In the event of a claim, the Insured must immediately give notice to the Company of the claim or other communication received by the Insured or his or her authorized representative. 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 with the available information.
The policy language clearly states that you must report malpractice claims. Even if you chose to ignore this condition, insurer’s applications ask:
12. During the current policy year, have any claims or suits been made against the firm, its predecessor firms, or any of the lawyers proposed for this insurance that have not been previously reported to this Company
The renewal application requires a signature by an authorized individual from the firm who attests to its accuracy.
Once through the renewal cycle you have now lied about not reporting claims. Given that claims frequency and severity are key rating and underwriting factors you are now in material breach of the policy contract.
If later the not reported malpractice claim turns out to be something that was not ‘small’ and the law firm now turns it in, the claim will get declined. More problems are in store for the law firm.
If an unrelated malpractice claim is subsequently turned in and the insurer finds out that the firm did not disclose the 1st claim, the malpractice insurer can use this as justification to decline coverage on the 2nd claim. Given the circumstances, it is likely that the insurer will non-renew the attorney malpractice insurance or they might rescind coverage entirely.
A nonrenewal notice for not reporting claims will guarantee the law firm is going to surplus lines. The firm can count on premiums being much higher for years to come. But it can get worse.
If coverage is rescinded, there is now no coverage, and the firm suddenly has no past acts coverage. Attorney malpractice insurance is a claims-made policy. The coverage inforce at the time a claim is made is the policy that answers and the insurer that covers the claim. With claims-made coverage, the other coverage condition is the act needs to have occurred after the prior acts date. There is no prior acts date and is no insurer to report a past acts claim to. If the firm can obtain a new attorney malpractice insurance policy, it will be without prior acts coverage and will be very expensive. The firm’s prior acts coverage is permanently gone.
If in doubt report.
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Lee Norcross, MBA, CPCU
California License # 0D87292
L Squared Insurance Agency, LLC ® DBA in California as
L2 L Squared Insurance Agency, License # 0L93416
Managing Director, CEO
(616) 940-1101 Ext. 7080