If your firm receives a demand letter, I have good news for you: Your firm has not been sued (yet). However, a lawsuit could be on the horizon.
A demand letter often precedes a lawsuit and usually represents an opposing party’s desire to resolve a dispute before involving the court system. The demand letter may include an alleged series of facts, followed by potential legal claims, and a demand for specific action or payment in response to the alleged claims. Your firm needs to promptly notify their malpractice insurance agent/insurance carrier.
Firms may be reluctant to report claims made against them. The Firm may feel that the Malpractice Claim is small, and they can cover it themselves and this helps their insurance history, thereby keeping their Malpractice Insurance premiums low.
This strategy of keeping you premiums low sometimes works with property insurance. But not reporting a Malpractice claim will put you in violation of the policy conditions. The following is typical wording for Malpractice Insurance policy requirements for reporting a claim. This wording from Medmarc Insurance Company Lawyers Professional Liability policy form is typical:
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 insurance carrier’s renewal application again asks:
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.
If at a later date the Malpractice claim turns out to be something that was not small, and the Firm does turn it in, they are likely to see a declination of coverage, especially if the firm as gone through the renewal cycle.
The Firm’s coverage problems have only just begun. If an unrelated Malpractice claim is turned in at a later date and the carrier finds out that the firm did not disclose the 1st claim. The Malpractice carrier can also use this as justification to decline coverage on the 2nd claim. Depending on the circumstances at this point, it is likely that the Malpractice carrier will non-renew the Malpractice Insurance Coverage or they might also ‘rescind’ coverage entirely for not just the current policy year but past policy years.
A nonrenewal notice for not reporting claims will guarantee the firm going to surplus line. If coverage is rescinded, it is like no coverage existed and the firm suddenly has no past acts coverage. Rescinded coverage is very difficult to repair, if at all. And the Firm’s next Malpractice policy without prior acts coverage will be very expensive for years to come.
Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080