Jean-Paul Rudd | Partner | Adams and Adams | mail me |
Can a professional services firm rely on a client’s assurance to avoid notifying its claims-made liability insurer of a claim? This question holds significant importance in claims-made professional liability insurance.
The insured must disclose potential claims upon first becoming aware of an error or omission. The timing of disclosure often determines coverage and resolves disputes between insurers and insureds under these policies.
US case study
A recent case, Minn. Lawyers Mut. Ins. Co. v. Rasmussen, Nelson & Wonio, examined this issue. The Iowa Court of Appeals considered a law firm’s obligations under a claims-made policy.
The firm failed to renew a financing statement related to a multimillion-dollar property transaction. In the US, a financing statement secures rights over property, similar to mortgage or notarial bonds in South Africa.
The firm’s clients informed them about the oversight. Although the clients assured the firm that no legal action was planned, the firm did not disclose the incident. When renewing its professional liability insurance, the firm omitted the disclosure.
Later, the clients’ attorneys indicated that legal action was forthcoming. This prompted the firm to notify its insurer. The insurer denied coverage, citing the firm’s failure to report the potential claim upon first awareness of the omission.
Obligations under a claims-made policy
The trial court (court a quo) upheld the insurer’s denial of coverage. It found that the firm’s failure to disclose the incident at renewal violated the claims-made policy terms. On appeal, the Iowa Court of Appeals affirmed the trial court’s ruling.
The law firm argued that client assurances relieved its obligation to notify the insurer. The court rejected this argument. It emphasised that the policy considered a claim “made” when the insured first became aware of an error or omission.
The renewal application required disclosure of any incident that could “reasonably” result in a claim. The court focused on whether an objective basis for a claim existed, not the insured’s subjective belief about litigation.
Lessons from the US case
The court concluded that the firm should have reported the omission when it was first discovered. The policy terms clearly and unambiguously required timely disclosure of potential claims.
The lessons from the US case underscore the importance of adhering to notification requirements in claims-made policies. The principle applies equally in the South African context. The duty to disclose arises once a reasonable basis for a claim exists. Subjective beliefs or assurances do not negate this obligation.
