Giving Notice of Claims and Potential Claims: How Your Policy Works
By: Kevin F. Arthur, Esq., Kramon & Graham P.A.

The notice provisions in your Legal Mutual policy are among the most important provisions that the policy contains. Unless you comply with those provisions and give proper and timely notice of claims and potential claims, you may find that you or your firm have lost the right to a defense or indemnification under the policy. The purpose of this article is to provide a brief summery of how the notice provisions work so that you can avoid the potential calamity of having to defend against or pay an uninsured risk.

How do you give notice of a claim?
The policy requires that you give written notice to Legal Mutual; oral notice will not suffice.

In addition, the policy states that your written notice does not become effective until Legal Mutual actually receives it. Hence, you will not have given proper notice of a claim until Legal Mutual has actually received the notice in writing.

For two reasons, it does not suffice to give notice, even in writing, to your insurance agent. First, because the agent is your agent (and not Legal Mutual's agent) under Maryland law, notice to the agent does not constitute notice to legal Mutual. Second, and in any event, the policy dictates the way in which you must give notice - and it does not permit you to give notice to an insurance agent.

The best way to give written notice is to send your written notice by facsimile, hand-delivery, or certifies mail. By sending the notice in any of those ways, you can obtain documentation confirming that Legal Mutual received the notice and exactly when Legal Mutual received the notice. You should bear in mind, however, that the notice is effective only if Legal Mutual actually receives the notice during your policy period or any extended reporting period or "tail."

In what circumstances should you give notice?
Generally, your Legal Mutual policy requires you to give Legal Mutual notice in two circumstances: (1) when you receive a "claim" (i.e., a demand for money or services) concerning an act, error, or omission relating to your provision of professional services; or (2) when you become aware of acts, errors, or omissions that might potentially result in a claim against you.

You should bear in mind that, because of the latter requirement that you report "potential claims," you may have an obligation to give notice to Legal Mutual even if no one has yet formally asserted an actual claim against you.

At the extremes, it is easy to give examples of when you must give notice to Legal Mutual. For example, if you receive a summons in a suit charging you with malpractice, then you have indisputably received a "claim," i.e., a demand for money or services. Similarly, if your client's new attorney complains about your conduct and demands that you put your carrier on notice, then you have indisputably received notice of a potential claim, i.e., notice of acts, errors, or omissions that may result in a claim. In either case, you must give timely and effective notice to Legal Mutual in order to preserve and perfect your right to coverage under your policy. See, e.g., Continental Ins. Co. v. Culver, 1 F. Supp.2d545, 546-47 (D. Md 1998), aff'd, F.3d , 1999 WL 503527 (4TH Cir. 1999).

On the other hand, you probably do not need to give notice to Legal Mutual merely because a client has expressed some dissatisfaction about the cost, quality, or pace of your legal work. Without more — that is, without some additional facts suggesting that the client's complaint might cause a reasonable lawyer to suspect that he or she may have exposure to the client — a simple disagreement with a client or an expression of a client's dissatisfaction ordinarily does not require you to give notice of a claim or potential claim.

The more difficult cases fall between those extremes. For example, what if opposing counsel asserts that you have missed the statute of limitations, or that you have sued the wrong party, or that your alleged failure to comply with discovery obligations should bar you from presenting testimony crucial to your client's claims or defenses? Do you have an obligation to give notice of a potential claim merely because your opposing counsel has directly or indirectly attacked your handling of a case? In many cases, you may not. If , however, a court agrees that your alleged errors have compromised your clients' claim or defense, then you may well have an obligation to give prompt notice of a potential claim to Legal Mutual. Furthermore, you may have an obligation to give notice even if your client has not yet accused you of doing anything wrong, because the crucial factor is not the client's assertion of the claim but your notice of acts, errors, or omissions that may result in a claim.

What deadlines apply to the reporting of claims or potential claims?
To ensure that you will have coverage under your policy, you must report any claims or potential claims to Legal Mutual during the policy period in which you first become aware of them or in any extended reporting period or "tail" thereafter.

You have this obligation your policy is a claims-made-and-reported policy: It provides coverage only for claims that are both made and reported to Legal Mutual in a single policy period or in the tail. Therefore, if you fail to report a claim during the policy period in which you first become aware of it (or in any tail that you obtain after that policy period), you will lose any right to a defense or indemnification against that claim or potential claim.

Nor will you have the right to defense or indemnification under a later policy, whether from Legal Mutual or some other insurer. This is because Legal Mutual's Exclusion 13, like similar exclusion in most other legal malpractice policies, excludes coverage for claims arising out of acts, errors, or omissions that predate the effective date of the policy if you knew or could have reasonably foreseen that those acts, errors, or omissions might form the basis of a claim or suit against you. In other words, if you knew of a claim or potential claim during policy period but failed to report it to Legal Mutual during that policy period, not only will you lose coverage under the first policy, but you will also lose the right to claim coverage under any later policy.

What does this mean? Promptly report claims or potential claims during the policy period in which you first become aware of them!

Doesn't Legal Mutual have to show prejudice resulting from a delay in giving notice?
Generally, no. Like the court of most other states, the Court of Appeals has held that under a claims-made-and-reported policy an insurer has no obligation to show that it suffered prejudice when a policyholder fails to give notice of a claim or potential claim during the policy period in which the policyholder became aware of the claim or potential claim. T.H.E. Ins. Co. v. P.T.P., Inc.,331 Md. 406, 415, (1993).

That holding follows from the nature of claims-made policies, which differ in a fundamental way from the so-called "occurrence" that many lawyers know from other contexts.

Claims-made policies and occurrence policies are the mirror image of one another.

Under an occurrence policy, an insurer generally must provide a defense and indemnification against claims alleging damages that occurred during the policy period - and it must do so regardless of when the plaintiff asserts the claim, and indeed regardless of whether the plaintiff asserts the claim years or even decades after the policy period ends. By, contrast, under a claims-made policy, the insurer generally must provide a defense and indemnification only against claims asserting during the policy period - but it must do so regardless of whether the plaintiff suffered the alleged damages during or before the policy period began. In other words, under an occurrence policy an insurer may remain potentially liable for many years after the policy period ends, while under a claims-made policy an insurer's liability ands as soon as the policy period ends.

The concept of notice-prejudice makes sense in the context of an occurrence policy, but not in the context of a claims-made policy.

Occurrence policies typically require policyholders to give prompt notice of claims. Nonetheless, because the insurer remains liable on an occurrence policy long after the policy period en, an insurer can deny coverage on account of a policyholder's breach of its contractual obligation to give prompt notice only if the insurer proves that it suffered actual prejudice as a result of the delay. Md. Code Ann,. Insurance 19-110.

On the other hand, because a claims-made insurer's liability ends as soon as the policy expires, the policy no longer exists once the policy period ends. But because a policyholder cannot breach a policy that no longer exists, a claims-made insurer does not have to show that it suffered "prejudice" as a result of any such breach. In fact, it makes no sense to talk about the breach of a contract that no longer exists, much less "prejudice" resulting from any such breach. Thus, even without proof of prejudice, a claims-made insurer may deny coverage if the policyholder gives notice after the policy period ends.

Prejudice, in short, has no relevance to the analysis of an insurer's duty to a policyholder who has given notice after the expiration of a claims-made policy. Therefore, Legal Mutual (and any other claims-made insurer) need not establish prejudice before denying coverage for a claim or potential claim that you report ant time after the expiration of the policy period in which you first become aware of them.

When might prejudice make a difference?
Prejudice may enter into the analysis if you delay in giving notice a claim or potential claim, but still manage to give notice during the policy period in which you first became aware of the claim or potential claim. This might happen, for example, if you receive a claim (such as lawsuit) in the first or second month of the policy, but fail to notify Legal Mutual of the claim until the submission of a renewal application in the eleventh month of the policy.

If you completely fail to defend the claim or if you mishandle the defense, Legal Mutual may have the right to claim that the untimely notice represented a prejudicial failure to cooperate. In that event, Legal Mutual may deny coverage or agree to defend you only under a reservation of its rights.

What do you have to disclose in renewal applications?
When a policy expires, you will probably file an application for a new claims-made policy - whether from Legal Mutual or from some other carrier. Legal Mutual's application, like other applications, asks a number of questions calculated to determine whether you have received a claim or become aware of a potential claim during the previous policy period.

For example, Legal Mutual's application asks:
Have there been any new claims, or changes in status of any claims [,] since your most recent application, such as settlements, potential claims which resulted in any suits or any suits dismissed?

Similarly, the next question asks:
Is any applicant aware of any circumstance which may result in a claim being made against any applicant, his/her predecessors in business or any past partner, corporate member or associate?

These questions should cause you to canvass your practice and to determine whether or others in your firm know of any claims or potential claims that you must disclose to your insurer before the expiration of your current policy. If you or firm have become aware of any such claims, the application provides an excellent opportunity both to identify them and to report them to your insurer while you can still perfect your claim to coverage.

Most important, you must answer these questions truthfully: If you do not answer truthfully and if Legal Mutual later determines that you knew of but failed to disclose claims or potential claims, it may either rescind your policy on account of misrepresentation, cancel the policy and return the unearned portion of the premium, or simply deny coverage under exclusion 13.

Will your premium go up if you report a claim or potential claim?
It may, but it may not go up to any material extent. In deciding to report a claim or potential claim, you should consider not only the potential increase in the premium, but the cost that you and your firm will have face if you have to defend against a claim and pay a settlement or judgment without insurance coverage.

Coverage.
Be scrupulous in reporting claims and potential claims. Be sure to report them in writing to Legal Mutual, and be sure to report them promptly (and in no event later than the expiration of your policy period). Finally, when in doubt about whether to report a claim or potential claim, err on the side of reporting - your fear of a theoretical increase in the premium should not outweigh the anguish and expense that you will certainly experience if you have to go out-of-pocket to defend and settle a malpractice claim for which you have forfeited your right to insurance coverage.

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