Thursday, May 29, 2008

Incident Sensitivity, Part 2 (3/20/08 Knowledge Knugget)

Why is Incident Sensitivity important?

  • If a claims-made policy is incident sensitive, or has a discovery provision, the insured may report to the carrier an error, a wrongful act, a circumstance, or an incident that it believes is likely to develop into a claim.
  • The claim trigger in a professional liability policy is usually a demand for damages. In the absence of a demand for damages, coverage cannot be triggered.
  • An insured could have a threatening letter from a disgruntled customer, a notice of intent to sue, a subpoena for information, or just a sick feeling in their gut when they realize an error has occurred that is likely to arise in a claim. However, until the demand for damages is actually made, whether in a demand letter or a suit, there is no claim.
  • In the absence of the ability to report a circumstance, an insured can know it will have a claim made against it in the future, and can be unable to move coverage when needed because it cannot ensure the future claim will have a home. New carriers will exclude the circumstance as a known wrongful act, or a circumstance which could reasonably be believed to give rise to a claim. The expiring carrier would not respond to the circumstance because it is not a claim, and would not respond to the future claim, because the policy would no longer be in force.
Can an extended reporting period solve this problem? Tune in to next week's Knowledge Knugget to find out.

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