Can a professional services firm rely on a client’s assurance that they will not pursue legal action to avoid notifying its claims-made professional liability insurer of a potential claim arising from an alleged omission?
Jean-Paul Rudd, Partner, Adams and Adams
This question is particularly significant in the context of claims-made professional liability insurance, where the insured’s duty to disclose any potential claims upon first becoming aware of an error or omission is critical. The timing of such disclosure is often central to determining coverage and resolving disputes between insurers and insureds under these policies.
Obligation to disclose
This issue was recently examined in the case of Minn. Lawyers Mut. Ins. Co. v. Rasmussen, Nelson & Wonio, where the Iowa Court of Appeals considered the obligations of a law firm under a claims-made policy.
The firm had failed to renew a financing statement—a document used in the US to secure rights over property, which is comparable in function to mortgage or notarial bonds in the South African context—in connection with a multimillion-dollar property transaction.
This oversight was brought to the firm’s attention by its clients. Although the clients assured the firm that no legal action was contemplated, the firm did not disclose the incident when renewing its professional liability insurance.
Later, the clients’ attorneys indicated that legal action was forthcoming, prompting the firm to notify its insurer. The insurer, however, denied coverage, asserting that the firm had failed to report the potential claim when it first became aware of the omission.
The trial court (court a quo) confirmed the legality of the insurer’s denial of coverage, finding that the firm’s failure to disclose the incident at the time of renewal violated the terms of the claims-made policy.
Assurance not enough
On appeal, the Iowa Court of Appeals upheld the trial court’s ruling, rejecting the law firm’s argument that its clients’ assurance not to sue relieved it of its obligation to notify the insurer of the omission.
The court emphasised that the policy clearly stated a claim is considered “made” when the insured first becomes aware of an error or omission that could give rise to a claim. It further highlighted that the renewal application required the insured to disclose any incident that could “reasonably” result in a claim, focusing on whether there was an objective basis for a claim, rather than the insured’s subjective belief about the likelihood of litigation.
Duty to disclose
The court concluded that the firm should have reported the omission when it was first discovered, as the policy terms were clear and unambiguous in requiring timely disclosure of potential claims.
This case highlights the importance of adhering to notification requirements in claims-made policies, a principle equally relevant in the South African context. It reinforces that the duty to disclose arises as soon as there is a reasonable basis for a claim, regardless of subjective beliefs or assurances.
