Few things ruin a professional’s week like an envelope or email from a client’s attorney. The letter says your work caused a loss, demands compensation, and gives you a deadline to respond. Your instinct may be to pick up the phone and explain, to write a detailed rebuttal, or to offer a refund and hope it goes away. Each of those instincts can create problems with your errors and omissions coverage.
E&O policies contain specific conditions about how and when claims must be reported and what you may and may not do once one arrives. Following them protects your coverage. Ignoring them, even with good intentions, can jeopardize it. This article walks through what a policy typically expects.
First, Recognize That It Is a Claim
Most professional liability policies define a claim broadly. It is not limited to a lawsuit. A written demand for money or services, a request to toll or waive a statute of limitations, a complaint to a licensing board, or in some policies even an oral demand can qualify. A demand letter from an attorney almost always meets the definition.
Many professionals delay reporting because the letter seems unreasonable, the amount is small, or they expect to resolve it directly. The policy does not care whether the claim has merit. It cares whether you reported it. Treating any written accusation of a professional error as a potential claim, from the moment it arrives, is the safest posture.
Report It Promptly, and In Writing
Claims-made policies typically require that claims be reported to the carrier as soon as practicable and, critically, during the policy period in which the claim is first made. Some policies allow a short grace period after expiration; many do not. A claim received in the last week of a policy year and reported a month later, after the renewal, can fall into a gap between the two policies and be denied by both.
Report through your agent or directly to the carrier using the method the policy specifies, and keep a record of the date and what was sent. Include a copy of the demand letter and a brief factual summary. You do not need to have figured out whether you did anything wrong; you simply need to give notice.
Do Not Admit Liability or Make Promises
Nearly every E&O policy contains a condition that the insured will not admit liability, assume any obligation, make any payment, or incur any expense related to a claim without the carrier’s consent. The reason is straightforward: once you have told the client in writing that you made a mistake, or offered to pay, the carrier’s ability to defend the claim has been compromised.
This does not mean you must be cold or evasive with the client. You can acknowledge receipt of the letter, say that you take the matter seriously, and explain that you have referred it to your insurance carrier and will respond through the appropriate channels. What you should avoid is a detailed defense of your work, an apology that reads as an admission, or an offer of any kind, including a refund or free work, until the carrier has weighed in.
Preserve Everything
Once a claim is on the table, the engagement file becomes evidence. Emails, working papers, drafts, notes of calls, engagement letters, invoices, and any communications with the client should be preserved exactly as they are. Do not clean up the file, do not delete anything, and do not create new documents that purport to explain what happened at the time. Most policies expect cooperation with the carrier’s investigation, and an intact file is the first thing the assigned defense counsel will ask for.
If the client’s files are stored in a shared system or a software platform, take steps to make sure they cannot be altered or lost through routine deletion policies.
What Happens After You Report
After notice, the carrier typically acknowledges the claim, assigns a claims professional, and evaluates coverage. If coverage applies, the carrier will usually appoint defense counsel experienced in professional liability in your field, at the carrier’s expense. Counsel will respond to the demand letter on your behalf, investigate, and advise on strategy.
Many claims are resolved at this stage without a lawsuit ever being filed. A well-drafted response from experienced counsel often persuades the client’s attorney that the claim is weaker than it appeared, or leads to an early settlement within the policy’s deductible. Either outcome is far better than an unrepresented professional trying to negotiate directly.
The Consent to Settle Clause
Most professional liability policies include a provision about settlement. Some give the carrier authority to settle within limits. Others require the insured’s consent, sometimes with a hammer clause that limits the carrier’s obligation if you refuse a settlement the carrier recommends. Understanding your policy’s approach ahead of time helps you make a clear decision if a settlement is proposed, especially when the proposal involves a payment that could affect your professional reputation.
Reporting Circumstances Before a Claim Arrives
Sometimes you know a claim is coming before it does. A project goes badly, a client expresses serious dissatisfaction, or you discover an error yourself. Most policies allow you to report these circumstances, and doing so locks in coverage under the current policy for any claim that later results. This is one of the most underused features of E&O coverage. Reporting a circumstance is not an admission and does not affect your premium in the same way a claim does at many carriers. If something feels like it could become a claim, ask your agent whether it should be reported.
Talk With an Independent Agent Before You Need To
The best time to understand your policy’s claim conditions is before a demand letter arrives. An independent agent who works with professional service firms can walk through your policy’s notice requirements, explain the consent to settle and defense provisions, and help you set up a simple internal procedure so that anyone in the firm who receives a complaint knows exactly what to do. And if a letter has already landed on your desk, the first call should be to your agent, today, before you respond to anyone else.
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