Claims Made Bites: No, the Renewal Application is NOT a Circumstance Reporting Mechanism

For this month’s Claims Made Bite, let’s talk about one sore spot for brokers and underwriters alike: the renewal application, specifically the warranty question. The warranty question varies from carrier to carrier, but generally speaking it will ask something along the lines of: “Are you or any member of your firm aware of any act, error, omission, or circumstance that could reasonably be expected to give rise to a claim against you?”

Brokers and underwriters often push against requiring the insured to answer this question on the renewal application. “We don’t want them to re-warranty their terms!” the broker tells their underwriter. And the underwriter acquiesces because they don’t want to motivate the insured to consider a competitor’s terms for renewal.

The idea is that if the insured answers “no” to a warranty question on the application that they somehow “break the chain of continuity.” I’ll let the Insurance Industry’s Educator in Chief Frederick J. Fisher, J.D., CCP explain:

This “continuity” concept supposedly allowed an insurer to accept a claim in a renewal year, even though the insured knew that a potential claim was brewing. This concept included matters under internal review as to exposure or possible rectification of a problem. The potential benefits to the insurer are two-fold. It allows the insurer to maintain its relationship with the insured. Moreover, it avoids the scenario of the insured using the potential claim reporting provision while at the same time renewing with another insurer.

As Fisher points out in his article, the claims department does not take the same stance as the underwriter and will often deny a claim if it was determined that the insured knew about a circumstance that could lead to a claim and failed to report it. The fact that the insured left the warranty question on the renewal application blank was not a saving grace, more of a moot point.

The solution then seems to be, “well let’s use the warranty question accurately and get the carrier notified on matters that may give rise to a claim!”

No, the warranty question on the renewal application will NOT satisfy the reporting requirement, as one insured found out the hard way.

The Case

Callister, Nebeker & McCullough was a law firm that switched its professional liability carrier from Ironshore to Old Republic. Back in 2010 Callister noted on a renewal application that they did have a known matter that may give rise to a claim. A client was considering taking action against them for an opinion Callister provided regarding an ESOP the client was forming.

Callister received notice about a month before completing their renewal application. They completed the app, and used the warranty section to note the potential lawsuit. Notice of circumstance satisfied, right?

Callister switched carriers in October 2013 to Old Republic, and in February 2014 their client filed a malpractice suit against Callister. Callister gave notice to Old Republic, who promptly denied coverage as this arose from a previously known matter. Then in April 2015 Callister notified their old carrier Ironshore about the claim (why did they wait 14 months?). Ironshore denied the claim since it was not reported in a timely manner.

In court, Callister contended that they DID provide notice in their renewal application. They answered the warranty question correctly AND provided details! How did that not satisfy the reporting requirement?

I’ll let the court explain:

“As the insured of a claims-made policy, Callister needed to strictly comply with the notice provision in the policy. Because it notified Ironshore of a potential claim only in renewal applications, and not in a formal notice of a potential claim, Callister has not strictly complied.”

“A renewal application… is “designed to seek a continuation of coverage from the insurer’s underwriters,” whereas a formal notice is “a document designed to seek recovery under the policy in effect at the time through [the insurer’s] claims mechanism.” The same rationale applies in this case, where the lack of formal notice means Callister has not strictly complied with Ironshore’s notice provision.”

The court further noted that the policy clearly and conspicuously stated that Ironshore required full details in order to comply with the requirement, “with full particulars as to dates, persons and entities involved.” The renewal application did not contain these extra details, and ultimately fell short of complying with the reporting requirements. Coverage voided.

What are Warranty Questions Good For Then?

So far we’ve determined that:

1. Leaving the warranty question on a renewal application does NOT preserve a “chain of continuity”
2. Answering the warranty question “yes” does NOT satisfy the reporting requirement of the policy

As to the utility of the warranty question, I’ll leave that for others to pontificate upon. I will say that carriers do reserve the right to ask their insured to apprise them of any circumstances that may give rise to a claim. And having the insured answer the warranty question does prompt important conversations with the agent.

Brokers, make sure that insureds are fully aware of:

• Their duty to report circumstances in a timely manner
• The reporting must fully comply with the requirements in the policy

Underwriters, make sure that your brokers are fully aware of:

• Leaving the warranty question blank doesn’t do the insured any good if they’re sitting on a circumstance that may give rise to a claim
• Reporting a known matter to you the underwriter does NOT conform to the requirements of the policy. They have to use the requirements in your policy in order to comply.

Insured’s should take the reporting requirements of their policies very seriously, and brokers and underwriters alike should appreciate the specific and conspicuously defined portions of the reporting section in their policies. This would help alleviate the heartache that comes from claim denials being upheld by courts for a simple failure in being blissfully unaware of what was clearly there in black and white the entire time.

Meet the Author

Lucas Roberts

Management Liability Broker, Burns & Wilcox

Lucas Roberts is an executive and professional lines specialist with experience in both underwriting and wholesale brokerage. He maintains an active LinkedIn presence, regularly sharing insights on claims made coverage developments. This blog takes a deeper dive into developments that have far-reaching consequences for the professional liability market.

You can see more of Lucas’s Claims Made Bites on his LinkedIn.