Sequence 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 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, 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, and 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 March 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 claims, even if most reports amount to nothing.
To deal with this problem, some policies permit circumstance reporting; 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 professionals involved in design or construction projects, it can help to review specific policy options such as Construction Risks and Insurance Considerations and how reporting requirements are handled under different contracts.
Know what’s in your policy and what it requires you to do so that you don’t jeopardize your coverage; resources like Professional Liability Insurance for Architects and Engineers outline common provisions and reporting practices.
If you have questions about a possible claim, talk to an agent.
Frequently Asked Questions
When should I report a potential claim to my professional liability insurer?
Report when a third party makes a demand for money or when circumstances clearly suggest a claim may be made; if unsure, contact your insurer or agent promptly for guidance.
What is circumstance reporting and why does it matter?
Circumstance reporting alerts the insurer to facts that might lead to a future claim and can lock in coverage under the policy in effect when the report was made.
Can late reporting cause denial of coverage?
Yes; insurers may deny defense or coverage if a policyholder violates reporting conditions, though whether a report was late can be a factual question for a court.
How should I document incidents to protect coverage?
Keep dated correspondence, meeting notes, photographs, and any written demands or requests; this record helps establish when you knew about a potential claim.