While it is certainly unpleasant to receive a letter requesting monetary compensation for an incident involving one of your employees or your company, it is best to act swiftly and handle your response professionally.
“During economic times like these, we see an increase in the number of people seeking monetary damages for all kinds of things,” says Lucy K. O’Shaughnessy, member in the litigation department at McDonald Hopkins LLC. “Even if you think the claim is frivolous, you cannot ignore it. Unfortunately, I see many situations where owners fail to report incidents to their insurance carriers and litigation follows. Litigation is a time-consuming and costly process.”
Smart Business asked O’Shaughnessy for guidance on how to respond promptly to these letters to avoid paying a great deal down the road.
What are the first steps to take if your business receives a letter?
Acknowledge the letter right away. Read it carefully. Call your lawyer and your insurance broker. Many types of commercial insurance policies specifically require notification of any claim or potential claim. Perhaps you are worried that your rates will go up if you submit the claim. Your broker can advise you on this matter. He or she will consider factors such as the size of the claim and your prior loss history to determine how the claim will affect underwriting and the ramifications of reporting it. You and the agent can then decide together if you must submit the claim.
Will your rates go up if you file a claim?
This depends on many factors. Again, talk to your agent or broker. Communication is the key quality of a good agent. An agent is not helpful if he or she is not responsive and does not return your phone calls. Try to develop and maintain a good relationship with your agent so that when things go wrong, you can feel confident knowing he or she will be there for you.
Why is it so important to act promptly?
There are two types of policies:
- An occurrence policy. Coverage triggers the date the loss occurs. This type usually has a requirement that the incident be
reported promptly or as soon as practical
- A claims made policy. This coverage
triggers when the claim is actually reported
to the insurer. If you know there is a claim
out there, you should report it right away. If
you wait, and during that time your policy
renews, you may not be covered because it
was not reported in time. If you delay, you
are jeopardizing coverage.
What if the claim is filed and coverage is denied?
There are many different reasons an insurer can deny coverage, but each should be based upon the specific facts of the loss and the carrier’s interpretation of the policy. In the context of our discussion here, we are hoping to avoid a situation where the carrier takes the position that the insured failed to provide a timely notice of the claim. If that is the case, the insured could file a declaratory judgment action (lawsuit) asking the court to determine each party’s rights and obligations under the insurance contract. In a case where the insurer contends notice was late and, as a result, there is no coverage, it will be up to the insured to show that the delay in notifying the insurer did not prejudice the rights of the insurer. Generally, the longer the delay, the better the insurer’s chances are of prevailing in this type of lawsuit.
For instance, if the insured does not notify the carrier of the claim until after a trial, the insurer has lost its rights to manage the defense of the case, to participate in the trial and/or to settle the case.
What happens if the business is served with a lawsuit instead of a letter?
Plaintiffs’ lawyers often put language in the complaint that will trigger insurance coverage. If you are served with a lawsuit, notify your lawyer and insurance agent immediately. It is also very important to retain any documents related to the subject matter of the litigation. In Ohio, there is a separate cause of action called spoliation of evidence. This arises if one party willfully destroys evidence after it has knowledge that litigation may ensue and the other party would have relied on that evidence.
It is usually advised at the beginning of litigation, or when a claim is filed, to take the proper steps to ensure that no information that has anything to do with the matter is destroyed, such as all of the information in computer systems, including metadata and deleted information.
Any final words of advice?
Make sure you have complete copies of your policies with endorsements and keep copies of your old policies indefinitely. You also should have a basic understanding of what types of claims are covered and what types are not and a good grasp of the amount of your deductable. Above all, if you receive a letter or are served with a lawsuit, act right away.
LUCY K. O’SHAUGHNESSY is a member in the litigation department at McDonald Hopkins LLC. Reach her at (216) 348-5837 or firstname.lastname@example.org.