Is It a Claim Yet? Understanding When to Report a Potential Claim

One of the most common questions design professionals ask is, “Do I really need to report this to my insurance carrier?” The question often arises long before a lawsuit is filed. In many cases, there has been no formal demand, no notice of litigation and no direct allegation of negligence.

That uncertainty can create risk.

Many professional liability matters begin as project concerns, dissatisfied clients, requests to investigate or correct a problem, or disputes among project participants. By the time a lawsuit arrives, opportunities to preserve evidence, manage communications and develop an effective strategy may already have been lost. Recognizing the difference between a potential claim and a Claim, and knowing when to involve your broker or carrier, can help protect both your coverage and your ability to manage a developing dispute.

Claims Usually Start Before Litigation

When design professionals think of a Claim, they often picture a lawsuit. In practice, a Claim may arise before litigation, and many disputes develop gradually.

A project issue may first surface through questions about a design decision, reports of a potential defect, requests for additional professional services or discussions regarding responsibility for delays or cost overruns. These situations do not always result in a Claim, but they may represent circumstances that could reasonably be expected to develop into one.

Is It a Claim or a Potential Claim?

The distinction is important. Definitions and notice requirements vary by policy, so firms should review their applicable policy language and consult with their broker or carrier whenever there is uncertainty.

Generally, a potential claim or circumstance is a situation, error, omission, project problem or dispute that could reasonably be expected to result in a Claim, even though no formal demand has been made.

A claim, as defined by the applicable policy, may arise before a lawsuit is filed. For example, a written demand seeking money, damages or other relief may satisfy the policy definition of a Claim and trigger the policy’s reporting requirements.

Circumstances That Should Prompt Consideration of Reporting

Situations that may warrant a discussion with your broker and notice to your carrier as a potential claim or circumstance include:

• Questions or allegations concerning a design error or omission.
• Notice of an alleged construction defect involving the firm’s professional services.
• Requests that the firm investigate or evaluate the cause of a project problem.
• Project concerns involving delays, cost overruns or additional construction costs.
• Discovery by the firm of an error or omission that could reasonably result in a Claim.

Not every project problem becomes a Claim. However, waiting until a Claim is certain may create unnecessary exposure and could affect the firm’s rights under the policy.

Situations That Constitute Actual Claims and Should Be Reported Immediately

The following situations may fall within the policy definition of a Claim and should be reported in accordance with the policy:

• Service of a lawsuit, arbitration demand or other formal proceeding.
• Demands for compensation or damages.
• Demands that the firm pay for corrective or remedial work.
• Requests or demands for indemnity.
• Demands to participate in mediation involving an allegation against the firm.
• Threats of litigation accompanied by a demand for monetary or nonmonetary relief.

Why Firms Wait

Many firms understandably hesitate to report potential claims or circumstances. Some believe they can resolve the issue directly with the client. Others worry about the impact on their claims history or assume there is no need to report a matter because they do not believe they did anything wrong. Perhaps most commonly, firms are simply unsure whether a particular situation qualifies as a Claim under the policy.

These concerns can contribute to delayed reporting at the very time when early involvement may be most beneficial. Claims professionals and defense counsel can often help firms evaluate developing situations before positions become entrenched and costs escalate. Firms should also speak with their agent about Great American’s Pre-Claims Assistance provision.

Why Early Reporting Matters

Many design professionals view claim reporting as an administrative requirement. In reality, timely reporting can also be an effective risk management tool.

When a potential claim or circumstance is identified and reported in accordance with the policy, early involvement allows the broker, carrier and defense counsel, as appropriate, to help the firm evaluate the situation before communications or decisions inadvertently increase exposure. When a Claim has already been made, prompt reporting helps preserve the carrier’s opportunity to investigate and respond in accordance with the policy.

In many cases, valuable assistance occurs long before a lawsuit is filed. A developing dispute may raise questions regarding project documentation, communications with the owner, preservation of evidence or participation in corrective work. Decisions made during these early stages can significantly affect both liability exposure and the firm’s ability to defend itself if litigation follows.

Early involvement may also help firms avoid common mistakes, including:

• Making statements that may later be characterized as admissions of liability.
• Investigating or proposing a solution without first considering how the work and related communications may affect the firm’s position.
• Participating in repairs without clearly defining responsibilities.
• Agreeing to redesign, revise documents or perform remedial professional services without understanding the potential coverage implications.
• Allowing important project records to become incomplete or unavailable.
• Missing opportunities to preserve evidence or retain appropriate experts.

Perhaps most importantly, early notice gives the carrier the opportunity to become a resource in the risk management process rather than simply responding after a dispute has escalated.

Firms sometimes worry that reporting a circumstance means a Claim has become inevitable. Many reported circumstances never develop into formal Claims. However, when a Claim does arise, firms are often in a stronger position if the issue has been identified and managed from the outset.