Most engineers carry professional liability insurance. Often the insurance is in the form of a "claims-made" policy, which provides coverage for claims that are made against the insured during the ter...
Most engineers carry professional liability insurance. Often the insurance is in the form of a “claims-made” policy, which provides coverage for claims that are made against the insured during the term of the policy regardless of when the damage or loss occurred. A claims-made policy will have a defined term, called the policy period, and will insure against claims made during that period. This type of policy provides the engineering firm with some comfort in knowing that it has current insurance for past events, provided that it did not hide a known potential claim from the insurer when it obtained the insurance.
A typical claims-made policy requires the insured engineer to report to the insurer not just official claims, but also any potential claims on the policy. Often insured parties are reluctant to report a potential claim out of fear it will adversely affect their premiums. However, failing to promptly report such a claim may make it more difficult to be indemnified by the insurer. This is especially the case with “claims made and reported” policies that require the report of a claim to be made within the policy period.
Following are some recent court decisions that highlight the need for engineering companies to report any potential claims under their professional liability policies to their insurers at the earliest opportunity. In the first three cases the insurance company was resisting having to pay coverage. Even though the courts ruled against the insurance companies and in favour of the insured professionals, in each case it was a long and costly process. As well, in an earlier case, the Supreme Court of Canada ruled that such decisions turn on the specific wording of each policy.
In Qualiglass Holdings Inc. v. Zurich Indemnity Co. of Canada, a 2004 case before the Alberta Queen’s Bench, the court considered whether an insured party was entitled to coverage under a claims-made policy. The plaintiff in this case suffered losses as a result of errors by a chartered accountant. The accountant had died bankrupt without defending the claim against him, so the plaintiff was claiming directly against the insurance company.
A claim had been made by the plaintiff, Qualiglass, against the insured accountant during the policy period, but the accountant did not notify the insurer until after the policy period. The insurer denied the claim, saying that the notice was too late because it was outside the policy period.
The court distinguished between a “claims made” and a “claims made and reported policy,” ruling that the triggering event for insurance coverage under the accountant’s “claims made” policy was the occurrence of a claim against the insured, and not the reporting of the claim to the insurer. The insurer, Zurich Indemnity, also argued that the accountant did not report the claim “as soon as practicable” as was required by the policy. The court ruled, however, that the delay in reporting was not sufficient grounds to deny compensation to the plaintiff.
While in the end the plaintiff’s claim was satisfied by the insurer, it was a long process. So as to avoid these types of disputes with its insurer, an insured should report potential claims against it as soon as potential liability becomes evident.
MWH International, Inc. v. Lumberman’s Mutual Casualty Co, a case in the B.C. Supreme Court of this year, shows that it is never too early to report a potential claim under a claims-made policy. After the construction of a hydroelectric dam was complete, problems arose in a concrete channel that had been designed by an engineering firm. When the owner of the dam demanded that the engineering firm investigate and explain the problems, it became apparent that the owner was pointing the finger at the engineering firm.
Accordingly, the engineering firm promptly reported the impending claim to the insurer. All these events occurred during the policy period of the claims-made policy. Later, after the expiry of the policy period, the owner of the dam sent a formal demand letter to the engineering firm, which then made its formal claim under the insurance policy.
The insurer refused to defend the claim against the engineering firm on the grounds that the demand letter and formal insurance claim were made outside the policy period. The court, however, ruled that reporting the potential liability to the insurer within the policy period was sufficient to trigger coverage and the duty of the insurer to defend the engineer. The potential liability was considered to be a claim within the meaning of the policy.
Site discussion reported as claim
In a much earlier decision, Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., heard in 1993, the Supreme Court of Canada ruled that even less significant events could be considered a claim. During a site inspection, an owner’s representative complained to the project engineer about the quality of the engineer’s work. The site inspection occurred on the last day before the end of the policy period. The engineer considered the complaint to be a claim for compensation and reported it as a potential claim to the insurer a few days later.
A formal claim was eventually made against the engineer by the owner, but the insurance company denied coverage to the engineer, saying the claim was made outside the policy period. Although the Supreme Court decided in favour of the engineer and held that the original complaint stemming from the site discussion was a claim made during the policy period, it was noted that each case turns on the specific wording of the particular policy at issue.
In summary, an engineer should notify its insurer as soon as a potential claim is identified. A delay may result in unnecessary disputes between the engineer and its insurer, and may result in the denial of coverage.
Beware of being co-insured
The last case revolves around a slightly different issue: the potential problems that could occur if you rely on a project professional liability insurance policy. Unfortunately, even when a party thinks that it has ample insurance, that may not always be true, as illustrated in another recent decision.
In Commerce & Industry Insurance Co. Canada, Inc. v. Singleton Associated Engineering Ltd., a 2005 case heard by the Alberta Queen’s Bench, a project professional liability insurance policy was issued to a project owner, which was building a 3,000-km high-pressure natural gas pipeline. The primary insurer, Commerce, issued a policy that included a number of engineering firms as named insured parties. The primary policy had a limit of US $10 million per claim and US $10 million in aggregate for all covered claims. Reliance Insurance issued a project professional liability insurance policy providing “excess insurance” coverage of US $15 million for claims in excess of the US $10 million that was covered under the Commerce policy. A further third layer of insurance provided excess insurance above and beyond the policies issued by Commerce and Reliance.
A number of legal actions gave rise to claims against the engineering firms totalling more than US $85 million, far exceeding the policy limits for the primary insurance policy. Reliance, which provided the second layer of insurance, was in liquidation and it was expected that it could pay only 50% of any valid claim. There were also concerns about the ability of the second excess insurer, which provided the third layer of insurance, to pay on any claims.
Several settlements were reached between the insurers and the claimants. However, the value of the settlements far exceeded the amount of insurance available. The court was therefore asked to decide, given the limited amounts of insurance available, whether the settlements should be paid on a pro-rata basis or in the order in which the settlements were reached.
The court ruled that the settlements were to be paid in the order in which they were made, and
not on a pro-rata basis. As a result, some of the claims could not be settled within the coverage provided by the project policies. The parties whose claims were not settled were expected to continue to pursue the defendants for compensation, and those defendants, including the engineers, would have to rely on their own insurance.
The judge expressly commented upon the risks of relying on project insurance. The lesson for any engineer who is a co-insured under project insurance is to report any claims to its own professional liability insurer, as the engineer may later need to rely on its own insurance if the project insurance is insufficient to satisfy all claims.
Philip Carson, Ph.D., is an associate with Miller Thomson LLP in Calgary. His practice is focused on commercial litigation and he has diverse business experience is in the petrochemical, waste management and oil and gas industries.