Firms get trapped by the sin of omission when completing the malpractice claims questions. This can happen with either the incumbent malpractice insurer’s renewal application or a new business application with a different insurer. “Prior Knowledge” of a claim is a leading cause for malpractice claims denials. Remember whether intentional or by accident, misinformation on a malpractice application can be used against you in a court of law.
Failing to report potential claims can cost the firm:
1. Failure disclosing a potential claim on the application or renewal application gives a malpractice insurer the right to rescind the policy if the misrepresentation is material. This will mean that coverage never existed.
2. Most "claims made" policies do not cover any act, error or omission you could have reasonably foreseen if not reported at the time when it first became known, so care needs to be taken when completing the application. This even is true when firms continue to renew with the same insurer. Many malpractice applications are treated as warrants. A failure to report a claim or potential claim can mean that the firm has breached its duty to the insurer and can be a basis for the claim denial even on unrelated future claims.
Here are a few traps that firms fall into when completing applications that can be avoided:
1. Make sure that the person completing the application polls the entire staff as to any potential or actual claims or incidents. The responsible individual should also have knowledge of any ongoing claims against the firm so that they are properly disclosed. If the newest staff member in the firm is completing the application remember that staff member will have no institutional knowledge of past claims or ongoing litigation. This can be a particular problem when the firm is shopping for alternative insurance coverage. The new associate providing application information might then complete a new business malpractice application without disclosing past claims. When the new staff member finds a price that is too good to be true the worst thing that can happen is the firm goes with this quote. If these claims come to light at a later date, insurance coverage could be rescinded; non-renewed; and future claims denied coverage.
2. Avoid the trap on disciplinary matters. Even if you do not believe that a disciplinary matter or inquiry might result in a claim, it is important to disclose on application(s). If the matter turns into a malpractice claim at a later date, the original notice of the inquiry could likely constitute “prior knowledge.”
3. If the firm is switching insurers, make sure that any potential claims are reported to the incumbent insurer prior to the expiration date of coverage. Absolutely insure that the matter is fully disclosed on the new business insurer’s application. Once disclosed to the incumbent insurer, coverage for this issue will continue with the incumbent insurer even past the expiration date. Your new malpractice insurer’s “claims made” policy language will exclude coverage for this matter.
4. When a claim is made prior to the expiration date of current coverage and a different insurer’s policy is bound for renewal make sure you notify both insurers prior to the renewal date. Remember with claims made coverage, once the old insurer’s policy expires that insurer is not responsible for matters that have not been reported prior to the expiration date. Conversely, the new insurer is not responsible for claims made prior to the effective date of new coverage.
5. Finally just because you reported claims or potential claims on the insurance application it may not constitute reporting the claim to the insurer. Make sure to follow the insurer’s instructions for reporting claims.
Following the above tips will help the firm avoid a number of potential “prior knowledge” or application claim traps.