Don's Discussion

Are you a member with a question? Contact IA&B Legal & Corporate Affairs Director Don Bankus at 717-918-9204 or DonB@IABforME.com.

QUESTION:

If an insured calls the agency to discuss a possible claim, is the agency obligated to report it to the insurance carrier?

ANSWER:

While at times you may evaluate such a scenario and feel as though you’re doing an insured a favor by not notifying the carrier, the actuality is that not only should the carrier be notified, but more likely than not, the agency has an obligation to notify the applicable carrier.

WHAT OBLIGATION?

An agency’s obligation to notify can be twofold, namely:

Contractual: Most – if not all – agency agreements contain language whereby the agency is contractually obligated to notify (and/or to direct an insured to notify) the carrier as soon as is reasonably practicable in the event the agency receives constructive knowledge of a loss or possible loss. Failure to notify the carrier as contractually required could constitute a breach of the agency agreement. This could trigger any number of other provisions in the contract which address default by the agency and which could have an effect on indemnification rights, ownership of expiration rights, and/ or termination rights of the parties;

Relationship: By virtue of the very nature of your relationship with carriers with whom you are appointed, being that you have established an “agency/principal” relationship, the agency owes the carrier a fiduciary duty. Failing to notify the carrier of an actual or potential claim could constitute a breach of this fiduciary duty.

WHY WOULD THE CARRIER WANT OR REQUIRE NOTIFICATION?

The primary reason and justification for providing the carrier with timely notice is to allow the carrier to conduct a comprehensive investigation of the facts and circumstances, in as timely a fashion as possible. The more time which passes between the actual circumstances giving rise to the claim and when an investigation by the carrier is able to be conducted, the more likely it is that evidence can grow stale or disappear and the less likely it is for possible witnesses (and/ or the insureds) to be able to provide accurate information and testimony. In short, significant amounts of both physical and testimonial evidence can be lost with the passage of time, and/or become less credible as more time elapses, which courts have found to be prejudicial to the insured and the insured’s carrier.

LAST, BUT NOT LEAST: A POTENTIAL E&O CLAIM

In addition to the above, the insured’s policy, whether auto, CGL, HO, etc., likely contains language whereby the carrier could attempt to deny coverage if an insured fails to provide “timely” or “prompt” notification of an occurrence, offense, claim, suit, accident, or loss. What may be dismissed by an insured as a non-claim today could potentially turn into a substantive claim at some point in the future. So in the event an insured contacts the agency, neither you nor the insured provides notice to the carrier, and a claim is thereafter filed and denied based on failure to provide timely notice, it will be best to have your E&O carrier’s phone number readily available. You can rest assured the insured will be naming the agency as a defendant in its upcoming lawsuit.

While at first it may appear as though you’re doing an insured a favor by not notifying the carrier of a real or possible claim, failing to do so could potentially result in adverse ramifications for all interested parties, not the least of which is the agency.

This document is not a legal opinion and should not be relied upon as such. The intent of this document is to provide a general background regarding the topic or topics discussed, not to provide legal advice. Producers and agencies should consult an attorney regarding specific situations and specific questions with respect to the topic or topics covered in this document. Neither the Insurance Agents & Brokers nor any of its employees shall be responsible for any errors or omissions regarding any statements made in this document, nor any errors or omissions regarding any statutes, regulations, court rules, and/or any other government documents cited in this document.