Insurance Claims: Late or Inadequate Notice Can Cost You Your Coverage

It is upsetting enough when your insurance company denies a claim because your policy doesn't cover a particular loss. It is even more distressing, however, to learn that your claim would have been covered if notice of the claim had not been late or defective. Unfortunately, this is a problem that businesses of all sizes commonly face. In fact, the law books are full of cases where insurance companies successfully avoided paying claims because the insured failed to satisfy what is often called the "timely notice requirement."

Avoid Incorrect Assumptions

There are many reasons why insureds fail to give timely notice. Some policyholders incorrectly assume that by giving notice, their rates will automatically go up at renewal. Although no one can argue with a desire for low premiums, it is unwise to assume that you will prevent an increase by choosing not to report a claim, accident or occurrence. In fact, some policies require notice of all claims, accidents and occurrences — regardless of whether they exceed the deductible. Further, a company's claims experience is generally considered relevant to the underwriting process. Increasingly, renewal applications ask for information about claims, including unreported ones. Failing to answer an underwriter's questions at renewal time might allow the carrier to rescind the policy later on. Therefore, before you decide against reporting, always check with legal counsel, who can review the terms and requirements of your company's policies and advise you accordingly.

Some policyholders anticipate that they can avoid a claim by keeping the loss below the deductible. However, this is a risky assumption for your company to make. By the time the facts indicate that a loss likely will exceed the deductible, it may be too late to satisfy the timely notice requirement. Like most policyholders, insurers have a very real interest in minimizing loss. Therefore, they argue that late or inadequate notice impairs their ability to work with policyholders to keep the losses small. The courts have often been sympathetic to such arguments. Once again, it is important to talk to your legal and accounting advisers, who can help you better assess the potential loss that could result from a particular accident or occurrence.

Ignorance Is No Excuse

Many companies believe their policies don't cover a particular loss when, in fact, they do. Insurance is expensive, which is why you should never assume that your company is not covered for a particular type of claim or loss. The law books are replete with cases in which policyholders maintain that their failure to give timely notice should be excused because they didn't know that they had coverage for the loss at issue. While it is true that insurance policies are complex documents, courts are rarely persuaded by arguments of policyholder ignorance.

Some policyholders — particularly large organizations with multiple locations or many employees in the field — fail to give timely notice because they never learn about an accident, incident or occurrence until they are sued. Again, ignorance is no excuse. All companies should institute appropriate reporting mechanisms and undergo an annual review, such as the Much Shelist Legal Check-Up™, to ensure that these procedures are adequate and up to date.

If you have questions concerning timely notice requirements for policyholders or related insurance coverage and risk management issues, please contact Neil B. Posner or your Much Shelist attorney.

Neil B. Posner, head of the firm's Policyholders' Insurance Coverage department, focuses his legal practice in the area of insurance coverage, with specific emphasis on insurance recovery and dispute resolution, risk management, loss prevention and cost containment. His clients include a range of public and private companies, organizations, boards of directors, individual officers and other policyholders. Neil can be reached at 312.521.2623 or nposner@muchshelist.com.

This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances.

© 2008 Much Shelist Denenberg Ament & Rubenstein, P.C. All rights reserved.