Any prudent business obtains some level of insurance. Those periodic payments buy the peace of mind that insurance will step in when needed. In the event of certain unforeseen property damage, injuries or other losses, insurance provides the funds and legal support necessary for a business to avoid catastrophe. At least that’s how it should work.
Businesses rely on insurance as a hedge against potential losses. But too often insureds forget that an insurance policy is a contract – with both the insurance company and the insured having certain rights and obligations.
In the event of a claim the insurance company generally promises to
- provide lawyers and other professionals necessary to defend its insured, and
- pay for any losses or damage relating to the claim.
In exchange the insured pays regular premiums. But the insured’s obligations don’t end there. Wisconsin law and most commercial-insurance policies require the insured to report events to the insurance company as soon as reasonably possible – after receiving notice of a claim or after receiving notice of facts that could result in a claim. If the insured doesn’t do so, insurance companies can in some situations deny coverage. That leaves the insured with nothing to show for all those premiums.
Now I know some producers are thinking that’s no problem. If a barn roof collapses, a producer calls the insurance company that day. There’s no reason for anyone to wait. And that’s true of many types of insurance claims. When served with a lawsuit or when there is clear property damage, most insureds call their insurers right away. After all the sooner the insurance company is notified, the sooner the insured can be paid for the loss – or be provided with a lawyer to defend.
But a claim is not always so clear. Many insurance-coverage disputes arise when an insurance company takes the position that it wasn’t notified as soon as the insured became aware of facts that could result in a claim. An example might be helpful to explain.
Farm A sprayed pesticides May 25 on Field A. And then June 1 the owners of Farm B notice that the crops in Field B, which is adjacent to Field A, are not healthy. Farm B investigates and comes to suspect that Farm A may have over-sprayed, and the pesticides intended for Field A may have drifted onto Field B.
Farm B calls Farm A the next day to ask when Farm A sprayed and what it sprayed. Farm B informs Farm A that the crops in Field B are not looking good – and that it believes Farm A was the cause. Farm A doesn’t believe it had anything to do with the unhealthy crops, so it doesn’t take any action. After the conversation Farm B decides to wait a little longer to see what happens, hoping to confirm its suspicions.
Two months later Farm B finishes the necessary testing to confirm that Farm A was the cause. Farm B destroys the contaminated crops. Farm B then sends Farm A a letter alleging that Farm A’s overspray was the cause of the loss. Farm B demands that Farm A pay for all profits Farm B lost as a result. The letter states that Farm B will sue Farm A if it refuses to pay.
Farm A still believes it had nothing to do with the damaged crops. But because it has an insurance policy that covers that sort of dispute, Farm A promptly reports the issue to its insurance carrier. Much to Farm A’s surprise, the insurance carrier denies coverage.
The insurance company says under its policy Farm A was required to give notice June 2 of the potential claim. That’s when Farm B told Farm A it believed overspray was the problem. The insurance company says the late notice harmed its ability to defend against Farm B’s allegations. If it had received notice June 2 it could have sent someone to Farm B to inspect and test the damaged crops. Now all those crops have been destroyed. The insurance company is left without the chance to perform its own investigation.
Legally speaking the insurance company may be right. The issue is failing to report the potential issue to the insurance company June 2 when Farm A received notice of facts that could result in a claim. That may have harmed the insurance company’s ability to investigate while the evidence was still fresh and available. Despite having faithfully paid insurance premiums, Farm A may be left without insurance to cover its legal fees or any damages it must pay to Farm B.
The moral of the story is to report early and often. Any time an event occurs that could result in a lawsuit or an insured loss, notify the insurance company. Producers need to do that whether or not they think events ultimately will result in claims. The insurance company may not choose to investigate, but at least the insurance company is on notice – and a producer will have performed his or her notice obligations under the insurance policy.