By Roy C. McCormick

The importance of prompt and proper reporting of lawsuits and claims under commercial and personal liability insurance is clear. In light of the increasing numbers of insureds who are becoming the objects of lawsuits, it is time to review procedures that should and must be followed with respect to reporting third-party claims. The requirements are found among the conditions in liability insurance coverage parts and forms. Businessowners and homeowners policies, because of their widespread use, form the basis for our review.

Businessowners liability coverage in general, including ISO and AAIS forms, requires that the insured immediately send to the insurer copies of demands, notices, summonses or legal papers received in connection with a claim or suit. The insured is required to notify the insurer as soon as it is practical of an occurrence or offense that may result in a claim or suit, and to make certain that the insurer has written notice of claim or suit as soon as is practicable.

Homeowners policies reviewed, including AAIS and ISO forms, contain personal liability coverage conditions requiring the insured to give notice of an accident or occurrence as soon as is practical to "us (the insurer) or our agent." Some forms specify that the notice be written; others, that the insurer may request written notice. All policies are specific and clear with respect to a requirement that the insured promptly forward to the insurer every notice, demand, summons or other process relating to an accident or occurrence.

A variety of circumstances can lead to problems over compliance with notice requirements in liability insurance. However, the Georgia Court of Appeals made some distinctions and reached conclusions, in a case decided early this year, that provide constructively helpful guidelines for third-party claim reporting.

An insurance company's agency contract with an agency owner was determined by the court to create an independent contractor relationship between him and the insurer. The contract stated that he would "...provide all usual and customary services of an insurance agent on all contracts placed by the Agent with the Company."

A principal of an insured corporation was a brother-in-law of the agency owner. He relied on his in-law to procure needed business insurance and to determine amounts of insurance and the insurance company. The insured was sued for alleged illegal use of software materials and, in the process, for copyright infringement. The principal told his insurance counselor (brother-in-law) of the situation promptly upon service of suit. The latter advised that the pertinent policy did not cover the allegations, an opinion that was accepted by the insured.

The insured decided to file notice of claim with the insurance company 18 months after service of the suit, largely in an effort to secure payment of defense costs of over $1 million. The insurance company filed a motion for summary judgment based on failure of the insured to give proper notice to the insurer as required by the policy. The insured appealed trial court grant of the insurer's motion.

The appeals court focused on the fundamental condition precedent in the policy (in liability policies in general) that the insurer be given timely notice and delivery of suit papers. It stressed that "...neither the language of the policy nor anything stamped upon the face of the policy gave apparent authority to the independent insurance agent to receive the notice required to be given to the insurer...."

A distinction was made between the situation under review and one where "...the terms of a policy or instructions stamped on the face of a liability policy instruct the insured that it is to provide notice of suit, either to theindependent insurance agent or the insurer." Here, the independent insurance agent or broker was deemed the agent of the insured, a condition the court found underscored by the familial relationship and the absence of instructions beyond those for giving notice of suit to the insurer. It was held that the insurance company did not have a duty to defend in the circumstances. The trial court grant of summary judgment for the insurer was affirmed.

The case is identified as Southeastern Express Systems v. Southern Guarantee Insurance Company of Georgia; Georgia Court of Appeals; No. A97A0050. February 17, 1997. A detailed report of the case is found in Commerce Clearing House 1997 Fire and Casualty Cases, Paragraph 6035.

Reporting conditions in liability coverage parts and forms and conclusions reached by this and other courts lead to a reliable summary of procedures that must be followed when an insured is faced with a claim or lawsuit. Insureds must be impressed with the importance of reporting claims, or circumstances that could reasonably result in claims, without undue delay. Policy conditions, in general, provide for notice to either the insurance company or its agent.

Legal documents relative to a lawsuit or potential lawsuit, however, must be sent by the insured directly to the insurer.

If an insured receives a summons, demand or other legal document in connection with a lawsuit or potential suit and, for whatever reason, delivers it to the agency, the latter must forward it immediately to the insurer. *