Non-Reported Claims Settlements: A Claims Manager's Caution

by Steve Saunders

Steve Saunders is XL Design Professional’s Regional Claims Manager in our claims office in Norcross, Georgia.

When faced with a potential professional liability claim, have you ever hesitated to pick up the phone to report it? As a claims manager, I know that sometimes policyholders engage in informal and, perhaps, even formal settlement negotiations with owners, clients, contractors and others without first giving notice to their agent or XL Design Professionals.

They often do so with the best intentions. For example, they may think that failure to address the situation immediately may disrupt the project schedule or damage their good working relationship with their client. Or they may believe that because their liability is clear — or that the damages are so small — there’s no need to notify us. Or they may have had a bad experience with a previous insurance company and just want to avoid the hassle and the headache.

But, too often, I see the best intentions lead good people into bad situations that could have been avoided by getting us involved early. Without knowing it, policyholders often reduce — or even eliminate — the protection insurance provides and position themselves for even greater liability.

At XL Design Professionals, we believe early intervention and prompt dispute resolution is in everyone’s best interest: yours, your client’s and ours. We want (and need) you to report potential claims early. If you do, we can work on your behalf and to your advantage — but only if you give us timely notice.

Let’s look at some of the good intentions and common misconceptions, and how we handle them.

Misconception #1: It would take too long to report the matter and get a response from the insurance company.

XL Design Professional's claims supervisors are expected to contact you within 24 hours of your initial notice (either directly from you or through your agent) to us. If the liability is clear and the alleged damages are small, it may be a simple matter to authorize you to proceed with the resolution of the claim by direct negotiations with your client.

Misconception #2: A lot of small claims will cause your premium to go up the next time you renew your policy.

If the amount paid out is within your deductible, XL Design Professionals does not assess additional underwriting charges.

Misconception #3. The dollar amount involved is small and the potential for future complications minimal, so it seems like more trouble than it’s worth to report it.

What appears to be a minor situation can later cause very big problems. For example, let’s suppose an architectural or engineering consultant discovers that a wall in a project currently under construction does not meet fire codes and will need to be taken out and relocated. It looks like a small thing and the consultant agrees to pay the costs out of pocket and send a check to the owner or contractor later.

The consultant now thinks that all is resolved. It isn’t until several months later, when the project is closing out, that the contractor submits a claim to the owner for the delay and other damages that were unanticipated results of the change. And the demand totals an amount that will be difficult, maybe impossible, for the consultant’s firm to pay.

Even worse, if the claim is now submitted, coverage may be declined because the policy requires the policyholder to give timely, written notice of claims at the time they become known. The policy also says the insured shall "not, except at your own cost, voluntarily make any payment, assume any obligation or incur any expenses without our written consent."

The problem is that insurance policies are contracts. In exchange for premium we agree to provide coverage as long as the conditions of the contract are met. And, in order to treat all our policyholders fairly, we must adhere to those conditions with everyone. Now, even though the consultant had the best intentions, the failure to notify us in a timely manner and the assumption of liability leave us no choice but to decline coverage.

It’s not that the A/E/E firm is a bad firm; it just didn’t fully understand the potential problems when it decided not to report the claim.

Getting the Best Protection

An insurance policy is really a bargain — for a relatively small premium you are protecting yourself from a large amount of risk. But all policies, from the one that protects your home up to the one that protects your reputation, have conditions that must be met before coverage applies. These shouldn’t be seen as obstacles, but ways for you to assure that you get the best protection as quickly as you need it. If you uphold your part of it, we can do ours: We’ll respond quickly, we won’t count it against you if the settlement amounts are small, and we’ll be sure the paperwork is done right and that you are protected.

That is, after all, what you pay for and what we do best.