For property insurance not reporting small claims makes sense. With a property claim generally you know with great certainty the amount of damages quickly. If the property claim is below or right around your property claims deductible, then handle the claim. Problem with attorney malpractice claims is that a ‘small’ claim might not stay small, but more importantly it violates the terms of your malpractice insurance policy.
Law firms can be reluctant to report small malpractice claims. With a small claim the law firm feels that they can handle the legal malpractice claim and can cover it themselves. These strategies do help their insurance history thus keeping their attorney malpractice insurance premiums lower. But this strategy can cause a law firm to lose their malpractice coverage.
Non-reporting of attorney malpractice claims puts you in violation of the policy conditions. In addition to the current non-reported claim(s) at hand there can be consequences later.
The following is typical wording of requirements in an attorney malpractice insurance policy for reporting a claim. This one is the Medmarc Insurance Company policy form:
7.1. NOTICE OF CLAIM
In the event of a claim, the Insured must immediately give notice to the Company of the claim or other communication received by the Insured or his or her authorized representative. If the Insured receives information of specific circumstances involving a particular person or entity that could reasonably be expected to result in a claim, the Insured shall notify the Company as soon as practicable with the available information.
The policy language clearly states that you must report the claim. Even if you chose to ignore this condition, the Medmarc renewal application and other malpractice insurers’ renewal applications ask:
12. During the current policy year, have any claims or suits been made against the firm, its predecessor firms, or any of the lawyers proposed for this insurance that have not been previously reported to this Company
The renewal application must be signed by an authorized individual from the firm who attests to its accuracy.
Once through the renewal cycle you have now lied about not reporting claims. Give that claims frequency and severity is key rating and underwriting factor you now have a material breach of the policy contract.
If later the not reported malpractice claim turns out to be something that was not ‘small’ and the law firm now turns it in, the claim will get declined. More problems are in store for the law firm.
If an unrelated malpractice claim is subsequently turned in and the insurer finds out that the firm did not disclose the 1st claim, the malpractice insurer can use this as justification to decline coverage on the 2nd claim. Given the circumstances, it is likely that the insurer will non-renew the attorney malpractice insurance or they might rescind coverage entirely.
A nonrenewal notice for not reporting claims will guarantee the law firm is going to surplus lines. The firm can count on premiums being much higher for years to come. But it can get worse.
Attorney malpractice insurance is written on a claims-made policy form. Simply the coverage inforce at the time a claim is made is the policy that will answer and the insurer that will cover the claim. With claims-made coverage, the other coverage condition is the act needs to have occurred after the prior acts date. If coverage is rescinded, there is now no prior coverage and the firm suddenly has no past acts coverage. There is now no insurer to report any current or future claim to. The firm’s new attorney malpractice insurance policy issued without prior acts coverage will be very expensive. The firm’s prior acts coverage is permanently gone.
If in doubt report.
Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080