Insurance Watch

No matter how competent you are as an engineer, it is virtually certain that at some time in your career, you will be sued for professional negligence. Statistics from professional liability insurers show that one claim is reported for every four policies that are issued, every year.

The fact that you are involved in a claim, and perhaps have been sued, doesn’t mean that you are an incompetent engineer; merely that you’ve been involved in a project where one of the other parties was dissatisfied. Typically, the cause of the problems that led to this dissatisfaction isn’t obvious and significant investigative and legal costs will be expended even in cases where you are absolutely blameless, all of which underlines the need for adequate professional liability insurance. That’s the bad news.

The good news is that this is a very good time to be purchasing professional liability insurance. The market is competitive and consequently rates have dropped by about 30% in the last seven years. So as long as you’re satisfied that coverages and service levels are comparable, it may pay to shop for a new insurer. Bear in mind, however, that there are potential risks whenever coverage with your present insurer comes to an end, whether that is because you are changing to find better insurance rates, or for other reasons such as upon retirement, or upon changing from private practice to employment in government or elsewhere where you may not be insured.

Professional liability policies are almost universally “claims made and reported” policies. That means the event that triggers coverage under the policy is not the negligent act itself, or even its discovery. What triggers the coverage is the making of the claim against you and your subsequent reporting of it to your insurer. Both must take place during the period of coverage provided by your policy for the policy to be triggered.

If someone makes a claim against you during the period covered by your policy but you fail to report it, there is no coverage for it under that policy and there may be no coverage for it under any succeeding policy either.

All such policies exclude coverage for claims made prior to the policy period, and they exclude “potential claims,” that became evident before the policy period.

Potential claims are claims arising from circumstances of an error, omission or negligent act from which a reasonable person would expect a claim to occur. The reason for the exclusion is obvious. Without it, one could simply first buy insurance, or buy a lot more insurance, once it became obvious that a lawsuit was on the way.

It becomes critical then to know when a claim or potential claim has arisen so that you can report it and trigger coverage. And let me repeat this point to emphasize its importance: the claim or potential claim must be reported during the policy period to trigger coverage.

There is no standard definition of a claim or potential claim and one should always look in the definitions section of each policy to see how these terms are defined. Among the policy wordings in common use, however, there appear to be some common elements.

Generally, a claim is an allegation of a breach or failure in the rendering of professional services. Note that it is not the negligent act itself that triggers coverage; it is the allegation that you were negligent — whether you were or not — to which the policy responds. This allegation may or may not be accompanied by a demand for money or services. If someone is alleging that you were negligent and they want to be compensated, it is a claim and must be reported.

Sometimes consultants receive ambiguous correspondence or communications that they don’t think of as a claim because the communication is not couched in the legalistic terms they expect. Thus they don’t report a claim to their insurers from laziness, pride or fear (they don’t want to bother the insurer, don’t wish to alarm their partner or employer, or they are afraid that to report trouble will trigger a higher premium). Eventually when an actual claim materializes they find to their dismay that they are not covered by their policy.

What to look for

What situations generally do or don’t qualify as claims? Obviously, if you are sued over your professional services, that is a claim. Or, if you receive a demand letter alleging that you were negligent and claiming compensation, that is a claim. But, what if you simply receive a letter from a lawyer representing one of the other participants in a project on which you worked requesting copies of your plans and specifications, or demanding answers to questions about some part of your work? Without more, that is not a claim as there is no allegation that your work wasn’t performed satisfactorily. However, if the letter also demanded that you correct your allegedly poor work or pay damages, that would be a claim. Reporting of these facts would trigger the policy.

Determining when potential claims have occurred is more difficult as they should be reported at the time they are first identifiable as such. Otherwise, when the claim is made at some future date the insurance company that provides your professional liability insurance may argue that the situation should have been reported to your previous insurer. The result may be that you have no coverage with either insurer.

The common thread running through the potential claim provisions of most policies is that you can and must report circumstances of an error, omission or negligent act from which any reasonable person would expect a claim to arise.

What are some typical potential claims situations?

You discover that you’ve made an error but no-one else, including your client, knows about it. Can you report it and must you report it? The answer to both questions is yes. Although it’s not a claim at the time of discovery, a reasonable person would expect that the error could give rise to a claim and the failure to report it at that time may result in there being no coverage for it under any policy.

You become aware that your client thinks that you’ve committed an error but you don’t believe that you have. Can and must you report it? Again, the answers are yes and yes. You can report it because a reasonable person would expect that these circumstances could give rise to a claim, i.e. an allegation of professional negligence, whether it is ultimately provable or not. And you must report it at the time that you become aware of it because if you don’t, a subsequent insurer may take the position that you had knowledge of the potential for the claim prior to purchasing their policy and therefore it is excluded.

Another interesting issue is whether it is the genuinely held belief of the insured that a claim could arise that creates the right and duty to report, or whether the use of the term “reasonable” implies reference to some other standard. The courts have consistently held that the belief of the insured is largely irrelevant and that it is only the belief of the mythical “reasonable person” (really the judge who ultimately might hear the case) that counts.

Leaky condo experience

In case you might think that difficult situations seldom arise concerning the reporting of claims or potential claims, consider the present position of many architects and engineers in British Columbia who did work during the 90s on building envelopes that have become part of the so-called “leaky condo crisis.” The buildings are typically three or four storey, stucco-clad, wood-framed structures that have serious water infiltration problems resulting in rotting and deterioration of the wood frames and wall components, and the growth of toxic moulds.

Due in part to uncertainty over the size and number of these claims, professional liability insurers have begun to withdraw coverage with the result that, as existing policies expire, architects and engineers can’t get forward coverage for these types of buildings. As a result, it is absolutely critical for consulting engineers to report and trigger coverage for any situation that might, at some future date, res
ult in a claim. A number of situations have been reported where coverage has been denied to the insured where more thorough reporting may have led to a different result.

One firm presented to its insurer a list of 100 municipal addresses, without any further detail, as 100 potential claims. That may not be as silly as it appears once you discover that each of the buildings on the address list fits the profile of the type of building where leaky condo problems have occurred.

However, coverage was denied as no information was reported that the buildings were presently failing, or that the insured had been negligent, or that the owners of the building were alleging that the insured had been negligent. The insurer is under no duty to investigate and discover facts to support a request for coverage. It is up to the insured to report sufficient facts to support its request for coverage. Having said that, it is hard to imagine that leaky condo claims won’t be made in connection with at least some of these buildings. Unfortunately, if they are, this insured firm will have no coverage for them.

In another case, an insured firm is being sued in connection with work on two identical projects. The first building had already begun to have problems and the firm was being sued for negligence. So the firm tried to put in a potential claim for the second building when their insurance policy was nearing expiry, but the claim was denied because at that time the second building was performing adequately and the owners were not alleging negligence for it. The insured firm did not specifically report that it may have been negligent and offer particulars of the potential negligence. The second building eventually did experience problems and the firm was sued, but not until after the expiry of the policy. The coverage issue is still before the courts.

How do you protect yourself?

If you discover that you may have committed an error, report it at once, providing as much detail as possible of all known and potential problems.

If you become aware that one of the participants in a project may be dissatisfied with you in your professional capacity, whether you think that you’ve done something wrong or not, report it, again providing as much detail as possible of all known and potential problems.

Don’t be content to rely on a simple reference to potential claims situations in your renewal application. Report with sufficient detail through formal claims channels.

Insist on a written response from your insurer as to whether the policy has been triggered or not, so that you may address any deficiencies in reporting.

Contact your insurance broker. The broker is an expert in these matters and can help you get as much from your policy as possible.CCE

David E. Waterhouse, B.A., LLB, is a lawyer practising with Gibson & Associates in Ottawa.