Professional liability is profoundly different from most forms of traditional insurance coverages. Unlike general or auto liability, professional liability policies include claims reporting provisions that might be unfamiliar and confounding to many contractors and inexperienced claimants.

While numerous providers offer professional liability coverage, most forms are unique and varied in terms; few policies are standard. 

However, professional liability policies have at least one common element. All insuring agreements include a “claims made” provision—a topic that could fill its own textbook. The claims made provision requires claims against the insured to be reported to the insurers during the policy period. Technically, coverage ceases for all new claims once the policy expires and is not renewed. 

This is different from other policy types that are more familiar to contractors, such as general liability insurance. These policies are “occurrence” based. This means the policy responds to events that occur during the policy period regardless of when the claim is made, even if it is several years after the triggering event.

The Catch
Due to their familiarity with occurrence policies, most contractors react to demands, lawsuits and related issues by simply sending claims onto the appropriate provider department for handling. It doesn’t matter if it’s received months or sometimes years after the alleged incident. The matter is still processed with insurance covering the problem.

Waiting for the formal lawsuit to arise before turning in a professional liability claim not only jeopardizes coverage, but also can create catastrophic financial problems for the policyholder. There are no alternatives. Providing claims to the insurance company during the policy period is a requirement that cannot be overlooked or neglected. Claims submitted beyond this time frame will not be considered.

Unfortunately, late reporting is a chronic problem for many contractors that do not fully understand the claims made caveat, which can negate claim payments for otherwise covered incidents. Another common problem is that many of these incidents do not even get to the claims stage due to contractors that:
  • think they are not responsible for professional-related services;
  • do not want to admit errors or point the finger at others who might be implicated;
  • try to fix things on their own without alerting the insurance companies or other entities; 
  • wrongly believe the cost to fix the damages are within the policy’s retention or deductible, so it’s not worth pursuing; or
  • avoid reporting claims because they believe it will adversely affect the procurement of future coverages.
In addition, it’s important to remember that a contractor acting as the signer of a professional liability insurance application is required to “warrant knowledge of any claim or circumstance that could give rise to a claim.” Therefore, it is always prudent to disclose all potential incidents or claims upfront rather than having them denied for nondisclosure reasons somewhere down the line.

Claims Notice Requirements
With most professional liability policies, claims notice requirements are outlined in the beginning of the policy’s insuring agreement or as part of the “contract.” It is an affirmative obligation for insureds to meet this obligation before the coverage applies.

Timing is also crucial. According to Amy Hudson, assistant vice president and counsel for The Hartford, “The other thing to keep in mind is that most professional liability policies provide coverage for claims made outside of the policy period, even in a claims-made coverage form, as long as the insured reports the professional incident in writing to its carrier prior to the end of the policy period.” 

Incidents/Circumstances
Though the terminology may be different among the varied providers, they all generally refer to the same condition. For instance, Hartford policies use the term “Discovery Clause,” while others, such as the Berkley Construction Professional Underwriters’ Contractor’s PERFORM Policy, include a “Reporting of Circumstance” section, and others use “Notice of Circumstance.” Regardless of the terminology, they all refer to the time frame when an insured first becomes aware of a potential claim—not a third-party lawsuit, not a regulatory authority demand and not an invoice sent from a third party.

A contractor needs to be receptive to any inkling of a problem, incident or circumstance rather than waiting for a prompt.

Now, the big question: How does a contractor identify an incident, circumstance or potential claim? Following are several indicators offered by Laila Santana, executive vice president and chief claims officer at Berkley Design Professional Underwriters:
  • discovery of errors or omissions that fall within the contractor’s scope, along with an indication from the contractor’s client or another party that a claim will be made at some point;
  • significant events during construction, such as a collapse or partial collapse, that could pertain to the design or professional services that the contractor provided or is vicariously responsible for;
  • budgeting or scheduling issues related to the contractor’s professional services scope;
  • significantly more change orders than anticipated in relation to the contractor’s professional scope/design;
  • other party allegations of project issues related to the contractor’s professional scope; and
  • third-party scrutiny from consultants hired by owners or other parties to review the contractor’s professional services or the plans/design.
Contractors have one more factor to consider in terms of reporting a circumstance. Insurance companies prefer to get an early notice so that if action is necessary, then a larger claim can be mitigated or avoided. The longer it takes to address a problem, the worse the claim (dollars paid out) can become. Clearly, insurance companies have an incentive to encourage early reporting by insureds and early settlement of issues to prevent litigation and save time and money.  

Managing the Process
Claims-made policies have been in existence for years, with many insureds successfully navigating the reporting requirements. Contractors can do this by just following some simple advice.

“Contractors, especially ones without an in-house risk manager, should keep an open door policy for field personnel to discuss issues with management,” Santana says. “Additionally, questions about issues and potential problems should be asked frequently during team meetings.”

Hudson adds: “It is critical that contractors establish well-communicated mechanisms for reporting claims and potential professional incidents from field operations. Ideally, the reporting should be made to one person responsible for insurance matters—either a risk manager or CFO, or a similar position.”

Although this open communication model may present a change from the everyday workings of most construction projects, it should be embraced rather than dismissed due to the implied punitive actions and the dire financial consequences that can be at stake. The alternative is just not worth the risk. Communication can make all the difference between paid and unpaid claims.


Timothy Farrell is senior vice president at New Day Underwriting Managers, Hamilton, N.J. For more information, email tim.farrell@newdayunderwriting.com.