Reporting claims which may just be beyond the deductible is a recurrent discussion with policyholders. Insurance agents and brokers are asked these delicate questions all the time. Independent Agent Magazine ran a story in 2005, Gray Area of Reporting Claims, discussing the issues that arise in reporting and not reporting a claim. Insurance agents and brokers should be wary about not reporting losses without full disclosure of all the consequences to the policyholder.

The discussion in the article was enlightening regarding the consequences the broker and agent may face if disclosure is not made:

…The VU group recently discussed an agent’s obligation toreport a potential claim to carriers if insureds tells the agent about it but arenot sure if they want to submit it to the carrier. What do you think?

First, consider each party’s contractual relationship in the transaction. The insurance policy is between the policyholder and the carrier. Whether insureds want to report a claim and take advantage of coverage is up to them. After all, insurance policies include deductibles to prevent a frequency of small claims reports. Depending on the type of insurance, insureds may have different responsibilities to report claims or potential claims; make the client aware of those provisions. If a client tells you that his Rolex was stolen and he wants to know if he should report it, should you feel obligated to recommend that he report the claim or advise him that he’s better off paying to replace the watch because it barely pierces his deductible? Check the policy language, but in this particular case of first-party property coverage, the insured has the right to absorb the claim if he chooses because he is a party to the insuring agreement.

The other contractual relationship to consider is your agency contract with the carrier…Are you an agent of the company or a broker representing the client…When it comes to contractual relationships with the parties involved in the claims reporting transaction, you must evaluate and balance your fiduciary duty to your client with your contractual relationship with your carrier.

Also think about the potential long-term impact the claim could have on both the insured and the company. If the insured doesn’t want to report a stolen watch, the long-term financial impact to the insured, company and your agency E&O is finite—the value of the watch. On the flipside, say your client gets into a minor fender bender with limited damage to the cars. If the incident is not reported and two months later the other person involved sues the client for bodily injury damages resulting from the accident, the insurance company could be on the hook for significant payout since it didn’t have the opportunity to mitigate loss through early settlement. The possibility of an unpaid claim went up significantly, and the potential E&O claim and carrier subrogation against you also went up.

If insureds decide not to report the claims and you agree with their decision to absorb the loss, fully disclose to the insureds what could happen if the claim is not filed (both short term and long term), document the file and request a written signed disclaimer about their decision. (emphaisis added)

It should be noted that this article ran in the errors and omission section of the Independent Agent Magazine. Under some forms, policyholders are obligated to report all losses if the policy is read literally. This is an absurd requirement because losses which are excluded or less than the deductible occur everyday. While insurance defense attorneys may argue that all losses must be reported, does the carrier want its policyholders to report the mars, nicks and scratches that happen everyday to most structures?

Still, not reporting a significant loss which may eventually lead to a claim in excess of the deductible is a very risky proposition. If one follows the “safe is better than sorry philosophy,” reporting is a much better practice. Insurers should be subject to consumer protection guidelines which prevent the reporting of unclaimed losses as an adverse underwriting criteria.