Full Disclosure – Tips on Completing Your Insurance Application

Deciding what to disclose in an application for a claims-made insurance policy can be difficult. Nevertheless, keep in mind that your application is the insurance underwriter’s best source of information, so take the time to complete it fully and carefully.

The Basics

The most common error in preparing the application is the failure to complete it. Leaving responses blank, failing to provide requested supplements, or providing nonresponsive answers can delay or even derail your application.

The first question on any application is, “who is the insured?” Provide whatever information is requested, as this is the underwriter’s primary opportunity to learn about your company – how long it’s been in existence, its size, previous revenues, largest projects – all of these questions help a prospective insurer understand the risk they may be undertaking. As well, if you are seeking coverage for related companies, be sure to make that clear. Not every related entity will satisfy the policy’s definition of “Insured,” so the underwriter will have to evaluate the additional exposure. 

It’s also important to give a complete list of your prior insurance coverage as requested (a request for information on the previous three to five years is typical). This is vitally important for a number of reasons – so that the underwriter knows with whom you were insured, and for what limits, and in the case of claims made policies, the number of years insured is one of the factors that will impact the retroactive date you’re offered.

Disclosing “Claims” and Facts or Circumstances Which Could Give Rise to a “Claim”

Your application will typically ask that you disclose information about: (i) your claims history; and (ii) any incident or circumstance which could give rise to a claim.

You should always report an already-existing claim – it will not be covered in any event, so concealing it is not helpful – and the failure to disclose could potentially void the policy if the information is later found to be material to the underwriter’s evaluation of the risk. 

In determining whether to disclose an incident, error, omission, fact, or circumstance which is not yet a “claim,” it is important that the right people be involved in completing the application. 

• • If the application asks whether anyone in an applicant’s “knowledge group” is aware of any circumstance which might give rise to a “claim,” it is important that the “knowledge group” (usually members of the applicant’s C-suite, legal, and risk management teams) be consulted and involved in completing the application.
  • If the application does not contain the “knowledge group” limitation, it likely will ask whether, after “reasonable inquiry,” the applicant is aware of any facts or circumstances which might give rise to a “claim.”
  • There is little law on what qualifies as a “reasonable inquiry,” but a reasonable course would likely be for the application be completed in collaboration with individuals who have manager-level knowledge of projects, such as project managers or division heads.

Disclosing a circumstance which could give rise to a claim is important, since many policies exclude coverage for claims arising from acts or omissions which took place before policy inception if the policyholder knew or could have reasonably foreseen that such acts or omissions might be the basis of a “claim” (but did not disclose it). The problem, of course, is that it’s not always clear that a given incident or circumstance may in the future give rise to a claim.  Several factors should be considered in deciding whether an issue reasonably might develop into a “claim.”

• • First, has anyone suggested that the applicant is responsible for a problem on the project? If so, the issue almost certainly should be disclosed.
  • Second, how significant an impact might the issue have? Regardless of fault, more significant issues — particularly those that impact a project’s critical path, cause delays, or require significant cost increases — are more likely to draw claims against all involved and should be disclosed.
  • Third, even if no one has suggested the applicant is responsible, does the applicant arguably bear fault for the issue? An issue for which there is even an arguable basis for liability of the insured should be reported. That said, even an applicant’s reasonable belief that it is not responsible should not prevent disclosure. A significant issue or one for which the insured has been blamed should be reported even if the insured honestly believes it is not liable.

When in doubt, it is better to disclose an issue than run the risk that a pre-policy error or omission gives rise to a “claim” but was not disclosed on the application.

Please contact Caroline Crosby or any member of the Phelps Insurance team if you have questions or need advice or guidance.