Most policies that cover third party claims require the insured to provide the insurance company with notice “as soon as practicable” after either an occurrence which may result in a claim (for occurrence-based policies), or after a claim (for a claims-made policy). Note that occurrence policies require notice of occurrences which “may” result in a claim; even if the third party never actually files a lawsuit or demands any money. For claims-made policies, a “claim” may include much more than an actual lawsuit. A simple letter demanding monetary compensation can constitute a “claim” triggering the notice requirement.
Failure to provide timely notice can potentially hinder the defense of the claim, and in some cases, the insurer may deny coverage due to late notice. Therefore, the “better safe than sorry” approach is often (but not always) the best advice. In other words, clients will often be advised to provide notice to the insurance company even if they are not sure that there is coverage.
But the decision is not always that simple, and a careful analysis of policies is in order before sending notice. For one thing, an insurer might not only respond with a denial, but with a threat to file a preemptive “declaratory” lawsuit seeking a court ruling that there is no obligation to defend or cover the claim. The insured should therefore evaluate the basis for coverage before providing notice.
Further, claims-made policies often allow an insured to give “notice of circumstances” that may reasonably be expected give rise to a claim that may be asserted after the policy period. Such provisions allow coverage when an act occurs within the policy period, but no claim is asserted until after the policy ends. Whether or not an insured can and should take advantage of such a provision requires careful analysis.
Finally, policies usually specific exactly how and to whom notice should be given. It is important to follow such guidelines.