Don’t Hesitate- Get What You Paid For

March 30th, 2016

Nearly all businesses buy general liability insurance, to assure that they are protected from law suits that might arise from claims of negligence, defective products, or even employee problems. And nearly all of the policy documents that insurance companies issue contain clauses that condition their responsibility for providing defense and indemnification from claims upon swift reporting when the insured business has reason to expect a claim to be forthcoming.

Often, businesses fail to appreciate how severe the outcomes can be if they delay in reporting the prospect of a claim. Management sometimes fears that if they report incidents that have not yet actually resulted in a law suit, the insurance companies will hike their premiums in the next cycle. We have even experienced situations where local agents actively discourage claim reporting, giving that fear as their reason.
Sometimes this is fueled by a failure to appreciate how the law in Virginia differs substantially from the law in other states. In most states, an insurance company cannot escape responsibility for defense or indemnification unless the insurer can prove that a delay in reporting prejudiced the insurer by making the case more difficult to defend. Insurance companies only rarely satisfy this tough standard.
But in Virginia, our state’s Supreme Court has repeatedly ruled that language in policy documents making the insurer’s obligations explicitly contingent upon timely reporting is enforceable exactly as written. The result is that a delay that probably would not have cost the customer its coverage in another state, will forfeit the benefit of the policy if Virginia law applies. And this is true even if the delay did not prejudice the insurance company at all.
Though every policy document has its own, unique wording, reporting is typically required when the insured first learns of the occurrence of an incident that could reasonably be expected to generate a claim. While suit papers sometimes do materialize out of the blue, in most cases, the insured has full knowledge of an incident months or even years before a suit gets filed. In Virginia, if an insured waits until suit papers are served to notify its liability carrier, it can expect to get a denial letter in response. Or, the insured may get a letter advising that the insurer will provide initial legal defense, but only until it can seek and obtain a court ruling that allows it to escape responsibility.
Once you know this rule, and the severe outcomes it can produce, you’ll understand why at Marrs & Henry, we typically advise clients not to delay in reporting incidents that might lead to future law suits to their insurance companies swiftly.
Delaying reporting out of concern for future premiums is too risky to be considered as an option. And after all, there is no point in paying those hefty liability insurance premiums if you are not going to claim the benefit of the coverages you bought when the need arises.