Claims Retrospective: What is a Claim under a Professional Liability Insurance Policy?
Some insured engineers continue to express confusion regarding what a claim is under a professional liability insurance policy. Typically, the confusion is the result of one of two scenarios. Either the insured engineer does not understand the difference between a first party insurance policy and a third-party insurance policy, or the insured engineer mistakenly believes that a claim can never occur until a lawsuit or arbitration is initiated against the insured engineer.
With respect to the first scenario, a first-party insurance policy covers losses that are incurred directly by the insured named on the policy, i.e., the policyholder. Accordingly, a claim in the context of a first party insurance policy is made by the policyholder, or insured, directly against the insurance policy. An example of a common first party insurance policy is a property policy. If you have a policy of insurance covering your house and your house is damaged, you make a claim to the insurance company under the policy and you are paid for your loss.
However, professional liability insurance policies are third-party insurance policies, meaning they cover losses or damages that the policyholder/insured has caused another party, i.e., third party, to incur. Accordingly, a claim in the context of a third-party policy is made by a third party to the policyholder/insured. Common third-party insurance policies include: homeowner’s liability policies, commercial general liability policies, and professional liability policies.
It is important that the insured engineer understand that under its professional liability policy, a claim is not made when the insured engineer requests assistance with or payment in relation to a dispute from its insurance carrier, but rather much earlier.
This leads us to the second, more common scenario where the insured engineer is under the mistaken belief that a claim only occurs once litigation or arbitration is initiated against them. While service of a complaint or receipt of a demand for arbitration certainly can be how a claim is first made under a professional liability insurance policy, it can also be made even earlier.
Most professional liability insurance policies define “claim” as a demand for money or services, whether verbal or in writing, received by an insured. Further, coverage under most professional liability insurance policies is triggered once the insured receives such a demand in conjunction with allegations that the insured committed an act, error, or omission in its professional services. Accordingly, a claim can take the form of an email, a text message, a letter, or even a verbal statement wherein a person or entity alleges that the insured engaged in a wrongful act and that the insured must pay for the costs arising from that wrongful act and/or perform services to correct that wrongful act.
Understanding what a claim is and when it is first made for purposes of the engineer’s professional liability insurance policy is critical to preserving insurance coverage for said claim. This is because most professional liability insurance policies are written on a claims-made-and-reported basis. When insurance coverage is written on a claims-made-and-reported basis, the date that the claim is first made in conjunction with when the claim is reported is determinative of whether there is a potential for coverage under the policy. Specifically, the claim must be first made within the coverage period (i.e., the one-year period listed in the declarations page) and then reported to the insurance carrier within a certain time period (i.e., 60 days) after it is first made in order for there to be a potential for coverage under the policy.
If the engineer fails to understand when a claim is first made, it runs the risk of failing to report the claim to the insurance carrier within the time required by the policy and may jeopardize coverage under its policy. Accordingly, engineers should err on the side of caution and report claims and even potential claims early and often.
