Tendering Your Claim
You never get a second chance to make a first impression.
This adage is never more true than when tendering a claim to your client's liability insurer. When the claim is tendered correctly, you can minimize delay, avoid disputes and establish a healthy working relationship with the insurer. Here are four simple guidelines for tendering a claim.
When your client is hit with a complaint, checking insurance coverage should be one of the very first steps. If you determine that the complaint might fall within the policy's coverage, you should tender it immediately. A liability insurer usually has no obligation to pay any costs incurred before it is put on notice of the claim. Such costs are almost always deemed to fall within the policy's exclusion for so-called "voluntary" payments by the insured. The case law recognizes only one narrow exception for situations in which "the previous payments were made involuntarily because of circumstances beyond [the insured's] control," such as "a situation requiring immediate response to protect its legal interests." Jamestown Builders v. Gen. Star Indem., 77 Cal.App.4th 341 (1999).
Thus, if you defer tendering a claim under a traditional commercial general liability policy, you will likely lose coverage for all defense costs incurred before the date of tender, even if the insurer later accepts coverage. For the same reason, if you enter into a settlement before notifying the insurer, it will have no obligation to indemnify the insured for that payment.
The impact of late notice can be even greater under specialized liability policies (e.g., Directors & Officers, Errors & Omissions, and Employment Practices Liability). Under these policies, defense costs normally reduce the limits of liability, and the coverage often is subject to a significant self-insured retention or deductible. Insurers will take the position that pre-notice defense costs cannot even be credited against the SIR.
Furthermore, these specialized liability coverages are almost always issued on "claims-made" or "claims-made-and-reported" policy forms. Under both types of policies, the coverage applies to "claims" first asserted against the insured during the policy period. Importantly, these policies sometimes define "claim" more broadly than in traditional CGL policies, which limit coverage to "suits." The definition can include demand letters, requests for a tolling agreement, the opening of an SEC or other regulatory investigation, and a variety of other pre-claim conduct. There may be coverage for defense costs incurred at this stage, but only if the claim is promptly reported.
Also be aware that "claims-made-and-reported" policies only afford coverage for claims that are both asserted against the insured and reported to the insurer during the policy period. The policies typically provide only a very short grace period of 30 or 60 days after the end of the policy period to report claims made during that period. Under these types of policies, if the claim is not promptly reported during the policy period, the insured will lose coverage altogether.
Obtain a complete, correct copy of the policy
Though it may sound obvious, one of the biggest challenges in tendering a claim can be obtaining the right policy or policies. You should not assume that PDF you receive from the client is all you need — it may very well be incomplete. Most policies contain a "schedule of forms" which lists, by form number (usually found on the bottom right-hand corner of each page), the various policy components. Make sure you have all relevant endorsements, as they often significantly modify the main policy form.
It is equally important to tender the claim under the correct policy year. Under a CGL or other "occurrence-based" policy, the relevant policy period is the one during which the claimant suffered the alleged damage or injury. Under a "claims-made" or "claims-made-and-reported" policy, the relevant policy period is the one during which the "claim" was first asserted against the insured.
Once you determine the correct policy year, be sure to obtain the applicable primary and any excess insurance policies. The insured may have an "umbrella policy" — a type of excess liability policy that sometimes provides broader coverage than a primary CGL. An umbrella insurer may be required to "drop down" and defend a claim not covered by the primary policy.
Under any type of excess policy, be aware that some excess insurers require notification of any claims noticed under the primary policy, even if you don't expect the claim to invade the excess insurers' limits. In either event, it is better practice to promptly place the excess insurers on notice. By doing so, you can avoid disputes and delays down the road, when you may need their limits to settle a claim.
Finally, if the occurrence or claim arose shortly after the policy incepted, the relevant policy may not yet be issued. If you are relying on a "binder letter" or other temporary proof of coverage, proceed with caution. Examine the coverage description carefully; do not assume the coverage is identical to the prior policy year.
Make your tender letter count
Theoretically, putting the insurer on notice of a claim requires only a brief cover letter enclosing a copy of the complaint. This approach is fine in the most straightforward cases. However, many claims are not so straightforward.
Provide the material the insurer will need to evaluate the claim. The tender letter should include all information relevant to establishing coverage, including material extrinsic to the complaint. For example, a complaint may allege that an individual wrongfully destroyed the plaintiff's property, without naming the individual's employer as a defendant. The employer may need to present its insurer with additional information to establish that the individual defendant was acting within the scope of his employment when he caused the damage alleged in the complaint. Under California law, the insurer is required to consider this extrinsic evidence when evaluating its defense obligation.
Address the coverage issues up front. It is much easier to convince an insurer at the outset that a claim is covered than it is to obtain reversal of a coverage denial. For this reason, insureds should anticipate coverage questions and address them in the initial tender letter. While some coverage issues will be fairly obvious on the face of the insurance policy — for example, the potential applicability of a particular exclusion — others will not be so readily apparent. The complaint may allege some conduct or seek certain remedies that are not expressly excluded by the policy, but are uninsurable under California law.
If the matter presents a close coverage question or a novel coverage argument, it is often best to entrust the task of preparing the initial tender letter to insurance coverage counsel. This will not only ensure that coverage issues are adequately addressed, but will allow defense counsel to maintain their impartiality. (Remember, in all likelihood, this same letter will request that the insurer approve the insured's choice of defense counsel.)
Finally, the tender letter should provide information regarding the case status and major upcoming deadlines (e.g., the deadline for the insured to answer or move to dismiss, the date and time of any initial status conference, etc.). Particularly where the insured is urgently requesting that the insurer assume the defense, it is important to explain precisely why the insured's need is so urgent.
Cooperate with the insurer's investigation
The insurer will often respond to an initial tender letter with follow-up inquiries. It does not behoove the insured to become defensive or obstructionist at this early stage. A claims representative who is considering accepting coverage will want sufficient documentation in the file to support that decision. Provide publicly available pleadings and court filings. Offer to set up a phone call or meeting to walk through the claim and answer any questions.
At the same time, it is not safe to assume that these communications with your insurer are privileged. Thus, it is inadvisable to disclose privileged litigation strategy, communications or work product to the insurer at this stage. And while there is certainly no rule against direct communications between the insurer and the insured, consider the fact that claims representatives are very often attorneys, trained in insurance coverage law. If it becomes clear that the insurer is questioning coverage, it may be best for defense or coverage counsel take the lead in responding to the insurer's inquiries.
Following these four guidelines will go a long way toward opening the lines of communication between insurer and insured. By taking these steps, the insured can avoid delay and minimize disputes.
Erica Villanueva is a partner in Farella Braun & Martel's San Francisco office, where she represents policyholders seeking coverage under commercial insurance policies.
This article is reprinted with permission from the February 10, 2012 issue of The Recorder. © 2012 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.