Issue Number 1, 2009

Most lawyers' professional liability insurance policies are claims made and reported policies that require insureds to provide notice of a claim to the insurer "as soon as practicable."  Two recent Texas Supreme Court cases have set limits on an insurer's ability to deny coverage based on late notice under such provisions.  In Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., No. 06-0598, -- S.W.3d -- (Tex.  March 27, 2009) and Financial Industries Corp. v. XL Specialty Ins. Co., No. 07-1059, -- S.W.3d-- (Tex. March 27, 2009), the court held that the insurer must still provide coverage despite a delay in reporting if the insurer has not been prejudiced by the late reporting.  The court noted, however, that the insured must report the claim within the policy period for a policy to apply.

The nature of the prejudice to the insurer sufficient to invalidate coverage is not discussed by the court in either case.  In Financial Industries, the parties stipulated no prejudice occurred, and in Prodigy the insurer admitted no prejudice to the insurer.

The types of prejudice that might result in enforcement of the provision include lack of opportunity to defend the claim.  In Prodigy, the insured failed to provide notice to the insurer for over a year after suit was filed, but did give notice within the time period of an extended reporting endorsement to the original policy.  The insured defended the matter until the time the insurer was notified, and the insurer does not appear to have questioned the adequacy of the defense or the reasonableness of settlement.  If the insured hired counsel who mishandled the case, an opportunity to settle at a lower amount was not presented to the insurer, or the settlement amount was unreasonable, perhaps the court would find prejudice.  When the insured has funded an adequate defense, the insurer may actually have benefited from the late notice, since most insurance policies do not cover defense costs funded without prior authorization.  It is conceivable that it may not be clear whether prejudice has occurred until the conclusion of the suit forming the basis of the claim.

It is important to understand that the new notice prejudice rule does not change the nature of claims made and reported policies.  The court specifically noted that claims still must be made and reported within the policy period.  Under occurrence policies, claims must have occurred within the policy period, but can be reported under "as soon as practicable."  PAJ, Inc. v. The Hanover Insurance Co., 243 S.W.3d 630, 636-37 (Tex. 2008).  Almost all lawyers' professional liability insurance policies today are claims made and reported policies.  Under a claims made and reported policy, a lawyer can have continuous insurance policies and yet lose coverage for failing to report claims within the policy period.

For practicing lawyers concerned with insurance reporting, the best rule is to consult with your insurer as soon as the lawyer has a reasonable basis to believe a claim might be made.  Failure to report within the policy period can result in loss of coverage, as could failure to report as soon as practicable.  Many lawyers fear that reporting will cause rates to increase.  Precautionary reports often do not affect rates, though the practice varies from insurer to insurer.  Dealing with claims early almost always saves money in the long run, and thus keeps insurance costs lower than they otherwise would be.  Good insurers have defense counsel and adjusters skilled at evaluating claims, so that claims which should be settled can be identified early before defense costs soar.