Don’t Delay Reporting Claims

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Jacqueline Butler did not receive a promotion from the Texas law firm where she worked, and she suspected that her race had something to do with it. In July 2001, she filed complaints with the Texas human rights commission and the federal Equal Employment Opportunity Commission. The EEOC notified the employer, who responded a month later.

The following spring, the EEOC informed Butler that she had the right to sue the employer, which she promptly did. In turn, the employer made a claim with the company that provided its Employment Practices Liability insurance. Four weeks later, the insurance company denied the claim; the employer had no choice but to pay for its own legal defense and any potential settlement. In 2006, the employer sued the insurance company for the costs of its defense, but a federal court in 2007 upheld the claim denial.

Why did the employer’s insurance not pay for a discrimination claim? Because the employer took too long to submit it.

A typical policy requires the insured to give the insurer notice of any claims made against it “as soon as practicable.” In the Texas case, the policy went further — it required written notice to the insurer “as soon as practicable and in no event later than sixty (60) days after such Claim was first made.” The insurer maintained that Butler made her claim in July 2001, when she filed complaints with authorities.

As evidence, it cited the policy’s definition of a “claim” as “any judicial, administrative or other proceeding against any Insured for any Employment Practices Wrongful Act.” Since the complaints filed with the authorities initiated administrative proceedings, the insurer held that they also constituted a claim. In the insurer’s opinion, the policy did not provide coverage if the employer did not give notice within 60 days of when Butler filed the complaints.

The employer argued that, since it notified the insurer within 60 days of receiving notice of the lawsuit, it had complied with the policy’s conditions. However, the court agreed with the insurer.

Insurance companies do not include this language in their policies simply to get out of having to pay claims. The sooner they know about events that might involve coverage, the better they can investigate and prepare legal defense. As time elapses, witnesses’ memories become less reliable, or witnesses might move away, and memos, e-mails, and other types of evidence might become hard to find.

Also, a claimant who has been kept waiting for a length of time might become angry and unwilling to negotiate a settlement. Therefore, even without a firm 60-day deadline, an insurance company might deny coverage when the insured fails to give prompt notice of a claim.

Courts have not developed a standard for what is “prompt” notice, but they normally consider three questions: How long was the delay? What are the reasons for the delay? How does the delay affect the insurer’s ability to handle the claim? Sometimes, a court will excuse a late notice if it decides the insured had a reasonable basis for believing it was not liable for any harm. However, in a situation where an employee has filed complaints with authorities, the court might not agree that such a belief was reasonable.

The safest course for employers is to notify their insurance companies or agents as soon as they become aware of any type of employee complaints to outside authorities. Even if the employer believes the charges to be groundless, it should put the company on notice. Our professional insurance agents can advise you on what the policy requires it to do when a charge is made. The best time to have that discussion is before something happens.

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