If a third party believes you or your business is responsible for personal injury or damage, and they decide to seek compensation, your company will likely receive a Letter of Demand (LOD).
No matter how far-fetched a claim may appear, whether you believe it happened or not, it is not something to ignore. Renee Cassidy – Whitbread’s Claims Manager explains…
What is a Letter of Demand?
“Also known as a solicitor letter, a LOD is a formal notice demanding that the person to whom the letter is addressed, perform an alleged legal obligation such as rectifying some identified problem, paying a sum of money or acting on a contractual commitment.
Most demand letters will include a deadline for action, and are often used to prompt payment, avoiding expensive litigation.
A demand letter often contains a "threat" that if not adhered to, the next communication between the parties will be through a court of law in the form of formal legal action.” - Duhaime.org Legal Dictionary.
In essence, a Letter of Demand (LOD) is a demand of payment for damages or injury arising from an event involving the person or entity to whom the letter is addressed.
Does it always come as a letter?
Not always. A LOD can come in many forms e.g. email, phone call, conversation in person etc.
Why might your business receive a Letter of Demand?
Your business may receive a LOD if:
- Another party alleges your business is legally responsible for third party injury or property damage.
- Compensation is sought.
With society becoming increasingly litigious, the number of claims for property damage and personal injury have grown significantly. Yet, even if the alleged claim appears ridiculous or unfounded at first glance, a LOD is definitely something to be taken seriously.
If your company fails to address the issue early, the case could end up in court, where legal expenses can very quickly escalate into tens of thousands of dollars – even if you’re not at fault.
How can insurance protect your business?
Public and Products Liability insurance is designed to protect you and your business from the significant costs associated with any legal action as a result of your actual or alleged negligence that has caused third party property damage or personal injury, whilst acting in the course of your business.
Steps to take if your business receives a LOD:
To help ensure your Public Liability Insurance policy responds effectively if you receive a LOD, we recommend following these four key steps:
1. Don't ignore it
Under no circumstances should you ignore a LOD. Ignoring even the most preposterous LOD could see your legal situation quickly escalate.
Over time I have seen some interesting claims come across my desk, and yes, even the most outrageous ones have been awarded with damages - take this for example:
Damages sought for a torn jacket.
An individual walked past our insured’s fence, and tore his jacket on a raised nail. This person then proceeded to send a LOD to our client claiming $80 to replace the jacket. Our client did not feel that they were responsible for these costs and did not respond to the LOD.
Unfortunately as the LOD was not addressed or reported in the first instance, the case ended up going to court. The claimant was subsequently awarded with $1,200 in damages which our client was required to pay, along with the associated legal expenses incurred by both parties.
Often we find that people who receive a LOD sit tight hoping the claim will go away, but generally ignoring a LOD only acts to intensify the problem.
If the issue at hand is not dealt with, your business is likely to be issued with formal legal action where the case may end up in court. As demonstrated in the example above, this can make the initial issue a whole lot bigger than it ever needed to be.
If a case goes to court, there are a number of preventable consequences that could arise:
- Legal costs – a court case will inevitably incur legal expenses and should the judge rule against your business’ case, you may also be required to pay the legal expenses of the third party.
- Excessive damages awarded – damages awarded against your business in court could be far greater than if the case was settled out of court e.g. the jacket case above.
- Mental angst – involvement in a court case could cause anxiety for business owner(s).
- Reputational damage – court cases can sometimes result in unwanted publicity, leading to reputational damage to your brand in the marketplace.
- Limited Insurance coverage – Your Public Liability insurer may not cover the damages and legal expenses in full, particularly if there is a delay in notifying the matter to the insurer. In the insurer’s eyes, the huge costs associated with a case being heard in court could have been significantly less if a LOD was dealt with when initially received. A suitable settlement for the demand could have been negotiated, circumventing the need to go to court. Based on this scenario, many insurers would not pay a business’ Liability claim in full, because legal expenses could have been avoided, and insurers in general are unlikely to accept any avoidable legal costs.
2. Notify the appropriate parties immediately
We always recommend that you inform your insurance broker, and your Public Liability insurer as soon as a LOD is received.
Benefits of early notification:
a) The insurer will take the situation off your hands
Once your business notifies your Public Liability insurer or insurance broker, the insurer will generally take care of the whole issue from the start on your behalf, removing the need for direct involvement in the dispute.
The insurer will:
- Review the LOD and advise on next steps to take.
- If required, engage legal representation to protect your interests, and liaise with the other party and their legal team who are seeking damages.
b) Expert advice from the start
Your insurer will know the best way to settle the claim i.e. whether it will be more beneficial to settle a claim out of court or not. They will be aware of win/loss trends in court for similar cases, and are in a position to make an informed decision on how to achieve the best and least costly outcome for the claim.
c) Settlement out of court
The insurer will likely seek to settle the claim as soon as possible to avoid formal court proceedings.
Early LOD notification to your Public Liability insurer can also give the insurer the opportunity to look at alternative ways to resolve the LOD, or share the cost of the damages with another party. In the torn jacket case for example, the home and contents insurer of the person seeking damages could have paid the claim.
d) Legal expenses covered by insurance
Public Liability Insurance can cover your legal expenses associated with the claim for damages up to the limit defined in the policy.
TIP: Don’t be discouraged from reporting a potential claim to your insurance broker or public Liability Insurer - it is to your benefit to report early, even if the claim doesn’t progress.
3. Do not respond to the letter personally and do not admit liability
- Instead of responding to the LOD, you need to inform your Public Liability insurer or broker. The insurer will determine whether there is any negligence attached to the claim on your behalf. There in fact may be no legitimate claim, in which case they will work to have the matter dismissed. The insurer will then respond to the letter appropriately on your behalf.
- You should never admit liability (fault) for the incident associated with the LOD. This could leave you open to legal action for damages, and prejudice the insurer’s position. It could be almost impossible to argue your case if guilt has already been admitted.
4. Do not pay the demand
If your business receives a LOD, refer it to the insurer who will take control on your behalf. Paying the demand could be interpreted as an admission of guilt, leaving you vulnerable to further legal action.
Other things to consider:
If an employee suffers an injury on your premises you would typically refer the case to the relevant Work Cover authority. The structure around work cover differs between the various Australian states and territories – for advice on this, please ask your Whitbread Insurance Broker.
Please note, a Public Liability policy does not cover claims relating to a specific product you may have sold / manufactured, which could result in a liability claim if third party damage / injury is caused by its use or consumption.
To protect yourself against events of this nature, a Products Liability Insurance policy is necessary. This coverage differs from a Public Liability policy. Click here to read more on Products Liability.
For further advice regarding Letters of Demand and your Public Liability Insurance, contact your Whitbread Insurance Broker on 1300 424 627.
This insight article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information or refer to our website.