While it is certainly unpleasant to
receive a letter requesting monetary compensation for an incident involving one of your employees or your
company, it is best to act swiftly and handle your response professionally.
“During economic times like these, we
see an increase in the number of people
seeking monetary damages for all kinds of
things,” says Lucy K. O’Shaughnessy,
member in the litigation department at
McDonald Hopkins LLC. “Even if you
think the claim is frivolous, you cannot
ignore it. Unfortunately, I see many situations where owners fail to report incidents
to their insurance carriers and litigation
follows. Litigation is a time-consuming
and costly process.”
Smart Business asked O’Shaughnessy
for guidance on how to respond promptly
to these letters to avoid paying a great deal
down the road.
What are the first steps to take if your business receives a letter?
Acknowledge the letter right away. Read
it carefully. Call your lawyer and your
insurance broker. Many types of commercial insurance policies specifically require
notification of any claim or potential
claim. Perhaps you are worried that your
rates will go up if you submit the claim.
Your broker can advise you on this matter.
He or she will consider factors such as the
size of the claim and your prior loss history to determine how the claim will affect
underwriting and the ramifications of
reporting it. You and the agent can then
decide together if you must submit the
claim.
Will your rates go up if you file a claim?
This depends on many factors. Again,
talk to your agent or broker. Communication is the key quality of a good agent.
An agent is not helpful if he or she is not
responsive and does not return your
phone calls. Try to develop and maintain a
good relationship with your agent so that
when things go wrong, you can feel confident knowing he or she will be there for
you.
Why is it so important to act promptly?
There are two types of policies:
- An occurrence policy. Coverage triggers the date the loss occurs. This type usually has a requirement that the incident be
reported promptly or as soon as practical
or possible. - A claims made policy. This coverage
triggers when the claim is actually reported
to the insurer. If you know there is a claim
out there, you should report it right away. If
you wait, and during that time your policy
renews, you may not be covered because it
was not reported in time. If you delay, you
are jeopardizing coverage.
What if the claim is filed and coverage is
denied?
There are many different reasons an
insurer can deny coverage, but each should
be based upon the specific facts of the loss
and the carrier’s interpretation of the policy. In the context of our discussion here,
we are hoping to avoid a situation where
the carrier takes the position that the
insured failed to provide a timely notice of
the claim. If that is the case, the insured could file a declaratory judgment action
(lawsuit) asking the court to determine
each party’s rights and obligations under
the insurance contract. In a case where the
insurer contends notice was late and, as a
result, there is no coverage, it will be up to
the insured to show that the delay in notifying the insurer did not prejudice the
rights of the insurer. Generally, the longer
the delay, the better the insurer’s chances
are of prevailing in this type of lawsuit.
For instance, if the insured does not notify the carrier of the claim until after a trial,
the insurer has lost its rights to manage the
defense of the case, to participate in the
trial and/or to settle the case.
What happens if the business is served with
a lawsuit instead of a letter?
Plaintiffs’ lawyers often put language in
the complaint that will trigger insurance
coverage. If you are served with a lawsuit,
notify your lawyer and insurance agent
immediately. It is also very important to
retain any documents related to the subject
matter of the litigation. In Ohio, there is a
separate cause of action called spoliation of
evidence. This arises if one party willfully
destroys evidence after it has knowledge
that litigation may ensue and the other
party would have relied on that evidence.
It is usually advised at the beginning of litigation, or when a claim is filed, to take the
proper steps to ensure that no information
that has anything to do with the matter is
destroyed, such as all of the information in
computer systems, including metadata and
deleted information.
Any final words of advice?
Make sure you have complete copies of
your policies with endorsements and keep
copies of your old policies indefinitely. You
also should have a basic understanding of
what types of claims are covered and what
types are not and a good grasp of the
amount of your deductable. Above all, if
you receive a letter or are served with a
lawsuit, act right away.
LUCY K. O’SHAUGHNESSY is a member in the litigation department at McDonald Hopkins LLC. Reach her at (216) 348-5837 or
[email protected].
