Lawyers professional liability insurance is issued through claims made and reported policies. This means that coverage is dependent upon whether, and when, a claim arises and/or is reported to the carrier. In other words, if a lawyer becomes aware of a claim and fails to report it to the carrier in a timely fashion, coverage may not be triggered, and the benefit of the insurance is lost. Thus, it is important to understand what is considered to be a claim under your policy.
The insurance definition of a claim is different from the legal definition. For professional liability insurance purposes, a claim most often is defined as any situation in which someone makes a demand for compensation based on an allegation that a person covered by the insurance policy has somehow breached a professional obligation.
That demand need not be a formal suit filed in a court. It can be as informal as a conversation in which a client claims that they have been harmed because of a failure on your part, or a letter stating that they are withholding payment because they are dissatisfied with your work. Sometimes claims of this sort are first mentioned by non-clients: maybe the child of your estate client, or another party to a transaction where you helped draw up the papers. Other times, the claim may be brought by a former client of someone who recently joined your firm, over work that attorney did in her prior job.
While many of these types of complaints might not ultimately be recognized as a viable legal claim under court scrutiny, they are enough to trigger a reporting obligation under a lawyers professional liability insurance policy. This means that, if you become aware of such a demand, you must report it to your carrier to trigger the available coverage provided by your policy. If you choose not to report (maybe you think the problem will blow over, or you can “fix” the problem without incident), you risk not having coverage if the claimant moves more formally later on.
Alerting your carrier to an informal claim can also jumpstart risk control services available under your policy. Your carrier may decide to connect you with outside counsel for guidance on how to address the problem, for instance, or who can help settle before anything develops further.
Additionally, under most policies, reports of potential claims is sufficient to trigger future coverage. So, if you recognize that something you have done or failed to do could result in damage to your client, and you report that potential to your carrier, you will have fulfilled your reporting obligations. Then, even if it is several years and policies later before an actual claim arises from that circumstance, your coverage under the policy that was in place at the time the potential claim was reported is available.
Early reporting of claims or potential claims helps both you and the insurance carrier, by allowing for early intervention and risk control.