Many of us have wondered at one time or another whether we should report a loss to our insurance company. From the slightest fender-bender accident on our property to a customer’s slip and fall, we often hope our insurer won’t find out or the loss will go away on its own. Frankly, some incidents are so minor they present no great risk of financial loss. So why should we report them to our insurers anyway?
Can you imagine how you would handle some losses if they were reported to you late? For example, let’s say you learned three years after the fact that your retirement pension had gone bankrupt. How would you feel? Like many of us, you might be very upset and think you had few options. Viewed from that perspective, it is understandable that insurance providers require their insureds to report losses in a timely manner.
Virtually all insurance policies specify when losses must be reported to insurers. Actually, you’re supposed to report any event that may give rise to a claim. One policy may require notice be given “as soon as practicable” after a loss occurs. Another may require the insured to give “prompt notice” of a loss. The words used often vary, but the intent is usually the same: If you want your insurer to pay for the loss, you have to report it promptly.
So what is prompt notice? Courts have interpreted the phrase differently. Some policies set specific time limits. It’s best to check your own policy to determine what you have already promised to do. Generally, notice needs to be given as soon as practicable, meaning “whatever is practical, relative to all facts involved” (from Principles of Insurance by Robert I. Mehr and Emerson Cammack, p. 214).
Occasionally, insurers have to decline coverage for a loss because of late notice. Insurance companies have a contractual and statutory duty to investigate losses promptly and pay claims fairly when liability for a loss becomes reasonably clear. Often, when losses are reported late, evidence has disappeared. If insurers can’t tell what they owe or determine who is liable, they may have to decline coverage; and courts have allowed them to do so. It’s impossible to list all the circumstances that may cause an insurer to decline coverage or prejudice it against late notice of a claim; suffice it to say, receiving a coverage denial from your insurer is no fun.
Build a Sound Relationship
At the heart of the requirement for prompt reporting of losses is the relationship of trust that must exist between insureds and insurers. Much of modern business relies on trust to some extent, inasmuch as not every contingency in a contract can be spelled out or some claims proven without expense. Insurance policies are two-party contracts, with promises made on both sides in exchange for coverage and a premium payment. Most agreements we make are good-faith contracts. However, insurance policies are contracts of utmost good faith, which is a higher standard.
This standard developed many years ago when insurance contracts were agreed too far away from the subject property of the insurance (i.e., you and your agent are in Boston, but your facility is in Florida). Insureds must be able to rely on their insurers to provide the coverage and service as stated in the policy; and insurers must be able to rely on their insureds to effectively underwrite protection and handle claims. How awful would it be to conduct business if we couldn’t rely on anything anyone said? It would certainly be expensive and time-consuming.
Of course, don’t even think about settling a claim made against you before reporting it to your insurer. Your attempt could waive all kinds of coverage and liability defenses. For example, perhaps you do not actually owe the claim, but other customers hear about the settlement and expect similar treatment. Once your insurer learns about it, after the fact, it may be inclined to cancel your coverage since you have violated your policy conditions, which allow it to handle claims that arise under your policy. The long and short of it is: If a loss occurs that might be covered under your policy, report the claim without delay.
What’s the worst that can happen when you don’t report a loss promptly? You may have to pay for the loss and the resulting expenses yourself. If it’s a loss that can’t be resolved outside the courthouse, the resolution could be extra expensive. Finally, why go through the grief of dealing with difficult customers who suffered a loss if you don’t have to? Clearly, it’s best to report losses in a timely fashion.
Jeffrey Duke is a claims manager for Phoenix based MiniCo Inc., a provider of specialty insurance coverage for self-storage businesses and customers. For more information, visit www.minico.com.