The reporting of a potential claim is an issue that most lawyers struggle with for two reasons. First, it can be difficult to define a "potential claim." Secondly, lawyers are sometimes reluctant to notify carriers of a potential claim due to concern and uncertainty regarding how it might affect their current and future relationship with their malpractice carrier or, for that matter, carriers they may approach in the future.

Before we get too far into potential claims, it is important that you understand how your policy defines an "actual claim." The following is a definition from one carrier's policy:"Claim" means a demand for money or services, or the filing of a suit or institution of arbitration proceedings or alternative dispute resolution naming an insured and alleging a negligent act, error, omission, or persona injury resulting from the rendering of or failure to render professional services.
Claim does not include proceedings seeking injunctive or non-pecuniary relief.It should be noted that some policies under the claim definition require a "written demand," while others require just a "demand," which would include verbal demands.

This is an important distinction and should be communicated to all attorneys within the firm accordingly. In addition to having a claim definition, most policies have a "discovery provision" which refers to the reporting of potential claim matters.

Noted below is an example: If during the policy period an insured becomes aware of any fact, circumstance or situation which may reasonably be expected to give rise to a claim being made against an insured and shall give written notice to the insurer, as soon as practicable (but prior to the expiration of or cancellation of the policy) of:

1. The specific fact, circumstance or situation, with full details as to dates, persons and entities involved; and

2. The injury or damages which may result there from; and

3. The circumstances by which the insured first became aware thereof; then any claim subsequently made arising out of such fact, circumstance or situation shall be deemed to have been made when notice was first given to the insurer.

The last sentence of the aforementioned provision indicates that by notifying the carrier of a potential claim during the policy period, you are actually triggering coverage for that claim under the current policy, regardless of when the actual claim is filed.An additional benefit of reporting potential claims is that you will not run the risk of a carrier denying coverage on a claim based on the issue of prior knowledge.

Virtually all carriers will want to exclude coverage for claims that the insured had prior knowledge of before policy inception or for claims that the insured could have reasonably foreseen. When you complete your application, you will find a question that specifically asks about potential claims.

Use this question as the catalyst to query attorneys in the firm if they are aware of any potential claims.

If potential claims are reported during this process, evaluate accordingly and report to your carrier in the application and also in accordance with the carrier's claim reporting requirements.

It is important to note, by reporting a potential claim only in the application, you run the risk of not providing formal notice to the carrier.Now not all situations will be as clear as missing a statute of limitations date, but if you apply common sense and take a conservative approach you should be well served.

If you are still uncertain whether or not to report a potential claim, I would suggest discussing the matter with your insurance broker or an experienced legal insurance defense attorney. Remember that any fact, circumstance or situation, which may reasonably be expected to give rise to a claim, should be reported.

In some instances law firms may be reluctant to report potential claims due to the perceived impact it may have on the marketability of their insurance risk.

In the soft market it appeared that reporting potential claims had little impact on a firm's ability to secure favorable insurance terms. In the current hard market, however, it is apparent that underwriters are looking at potential claims as closely as actual claims. Therefore, it is highly recommended that you take the time needed to carefully evaluate matters that may have potential claim exposure.