In this blog, part of a four-part series on the fundamentals of R&W claims, we provide an overview of R&W policies, explain when to notify carriers of claims, define aggregate retention and what it means for you, and clarify information about obtaining counsel once a claim is filed.
R&W Insurance: A Six-Year Policy Period Makes Reporting Claims Easier
R&W policies are specific to a single transaction; as such, they are nonrenewable and overall have six-year policy periods. Note, however, that some types of covered reps (general reps) have three years of coverage, while the remainder (fundamental and tax reps) have the full six years of coverage.
They are not occurrence-based policies but are more generally thought of as claim-based policies. Occurrence-based policies cover events that take place while the policy is in effect, regardless of when the claim was made. Claims-made policies, on the other hand, only cover claims that both occur and are reported during the policy period. The six-year period of R&W policies virtually guarantees there won’t be much of a problem providing notice to the carrier during the policy period.
Additionally, these policies are thought of as “backward-looking.” That means coverage is only for issues that the insured becomes aware of post-signing but that arose from actions or inactions that occurred before signing.
Notify Carriers of a Claim as Soon as Possible
Under R&W policies, the language specifies that providing notice of a claim should occur “as soon as reasonably practicable,” and insureds should err on the side of caution by notifying carriers of potential claims as soon as they can, even if all information is not yet available.
Fortunately, reporting of claims will not affect the relationship between insured and carrier since it is a transaction-specific policy. A carrier will generally balk at providing future coverage for an insured on a different or future transaction only if the prior claim devolves into a bad faith action by the insured against the carrier. Since the R&W market is a relatively new one, carriers are eager to show that they are as reasonable to work with on the claims side as they are on the underwriting side.
Aggregate Retentions: Report Even the Smallest Claims
Most insurance policies have either deductibles or self-insured retentions (SIRs), which work similarly. R&W policies have an aggregate SIR. Once the SIR has been exhausted by the insured’s payment of a covered loss, the policy will begin to pay out. An aggregate SIR means that all losses covered by the policy will serve to erode the retention that will apply to any future claims. If a retention is not aggregate but is instead a per-claim retention, the retention would separately apply to each claim noticed under the policy during the policy period. With aggregate retentions, there is no downside to reporting even the smallest claims.
Because of the aggregate nature of the retention, it is important to keep track of how much has been eroded by prior claims to carry it forward to any future claims. This practice is also very different from that of most other products — not only do most policies not have aggregate retentions, but the year-long effective period for most policies tends to eliminate the need to keep track of retention erosion.
For R&W policies, it is important to keep track of all claims, including requesting that carriers alert the broker to any claims the broker was not initially looped in on. The broker can then contact the client and counsel and let them know how they can assist throughout the claims process. A broker is best positioned to not only ensure smooth progress throughout the life of the claim, but to spur movement on both sides, explain viewpoints, and advocate for the insured while keeping the insured apprised of realistic arguments and outcomes.
Hire Your Own Counsel
With R&W insurance, there is no panel counsel requirement, which many other products have. This is where the insurer provides a previously vetted list of law firms that the insured can select from to represent its interests in the claim. Rather, the insured can generally use whichever firm it wishes. There are also no real guidelines for counsel to follow, just “reasonableness” language for representation and billing throughout the claim. In certain circumstances, the carrier may stipulate that the insured should seek permission before incurring a certain amount of defense costs or before resolving a claim.
Insureds often opt to have the law firm that handled the underlying transaction also handle the claim, assuming that familiarity with the transaction itself will be helpful. While it can be, they should also ensure that at least one attorney is litigation- and claim-savvy, so they have a coverage attorney who is familiar with the claims process and how policies work.
Additionally, the carrier has no duty to defend. This kind of duty contractually obligates the insurer to provide a defense for the insured against any claims. In such cases, the carrier would retain and assign counsel to defend the insured, and that counsel must continue to provide such defense until the claim is either resolved or it is proven that there is no coverage under the policy.
R&W policies are different from other insurance policies, so you should approach R&W claims differently. Knowing the basics about your policy and how claims work will allow you to do it correctly if the time comes. Look for additional articles in this four-part series on R&W claims, which also covers types of claims, areas of the policy that will impact coverage, and common coverage issues.