Consider the following chain of events:
An engineer designs the site and grading plan for a construction project. After the project’s completion, the developer finds that the parking lot is not draining.
In March, the developer writes to the engineer, accuses him of failing to follow recommendations in a geotechnical report, and orders him to create a plan to correct the drainage problem.
The engineer responds by saying that his design was sound but the contractor’s work was defective.
The engineer and developer hold several meetings to determine what caused the problem. The engineer sticks with his version of events.
In May, the developer writes again to the engineer, accusing him of committing design errors and shirking responsibility for the problem.
In August, the engineer notifies his liability insurance company that the developer is making a claim against him.
Sometime later, the developer sues the engineer, architect and contractor.
Question: When exactly did the claim occur, and when should the engineer have reported it to the insurance company?
In this case, the company said it did not have to provide a defense or coverage because the engineer violated the policy conditions by reporting the claim late. In the company’s opinion, the developer’s March letter was a claim that the engineer should have reported. A court said that the case would have to go to trial, as the report’s lateness was unclear.
The policy insured against claims occurring during the policy period and made within 60 days after the end. When, however, does a dispute become a claim, triggering the obligation to report it to the company? The answer turns on the policy’s definition of “claim”.
“… a demand for money or professional services received by the Insured for damages, including but not limited to, the service of a lawsuit or the institution of arbitration proceedings or other alternative dispute resolution proceedings, alleging a wrongful act arising out of the performance of professional services.”
The court applied this definition to the March letter, asking whether a reasonable person would have considered the circumstances known to the engineer as a possible claim. In the court’s opinion, the answer was no. Until the developer’s May letter, the court said, a reasonable person could have concluded that the developer was unsure as to who was responsible for the drainage problem.
The March letter ordered the engineer to develop a plan to correct the problem. The engineer believed he would be paid for creating this plan, an assumption the court found to be reasonable. Because one reasonable view of the letter was of a request and not a demand for services as compensation for damages, the court said that the case must go to trial to resolve the question of facts.
This case illustrates a dilemma for many organizations. If they fail to report incidents that eventually turn into lawsuits, their insurance companies might try to deny defense and coverage because of late reporting. Conversely, if they report every incident, no matter how minor, insurers could decide to drop coverage because of frequent reports, even if most of them amount to nothing.
Some policies permit circumstance reporting to address this problem. Under such provisions, the policy that ultimately covers the claim is the one in effect when the insured reports the circumstance to the company, if a claim results from that circumstance. For coverage guidance related to site and testing risks, see Construction, Environmental Testing & Liability Overview.
Know what’s in your policy and what it requires you to do so that you don’t jeopardize your coverage. For professional liability matters specific to geotechnical engineers, see Geotechnical Engineers Professional Liability Insurance. Or talk to an agent to review your reporting duties and deadlines.
Frequently Asked Questions
When does a dispute become a reportable claim?
A dispute becomes reportable when a reasonable person would view a communication as a demand for money or services for damages, not merely a request for assistance or information.
What is circumstance reporting and why does it matter?
Circumstance reporting lets you notify the insurer about a potentially problematic situation; if a later claim arises from that circumstance, the policy in effect at reporting may apply.
Can late reporting void coverage?
Insurers may deny defense or coverage for late reporting if policy conditions require timely notice and the insurer shows prejudice from the delay.
Should I report every complaint to my insurer?
Not necessarily; follow your policy terms and consult with trusted counsel or your insurer to decide what constitutes a reportable claim or circumstance.
Who should I contact if I'm unsure about reporting?
Discuss the matter with your insurance agent or broker to confirm reporting requirements and preserve coverage.