Errors & Omissions (E&O), Directors & Officers (D&O), Employment Practices Liability (EPL) and the liability section of Cyber Insurance policies are typically written using “claims-made” insurance policies. You may be wondering what “claims-made” means, how a claims-made policy works, and whether you need to know. Yes, you should know the basics.
By definition, a claims-made policy responds to a claim that is made during the policy period regardless of when the event leading to the claim occurs – subject to certain other requirements.
Why Claims-Made?
An important challenge in pricing insurance is the potential for a significant delay between when an event has occurred and when a claim is made.
Most standard general liability (GL) policies are written on an occurrence basis. An occurrence policy responds to a claim if the event leading to the claim occurred during the policy period. In theory a claim might be reported to the insurer many years after the event occurred, but reporting of a general liability claim long after the policy has expired is not typical for most business claims.
There are exceptions, however. Claims from professional services, in the employment realm and related to organizational management all could be reported long after a related event has taken place, and many are. A long delay between a causal event and a claim can create significant uncertainty for both the insured and the insurer, making pricing difficult and driving up insurance costs. A claims-made policy eliminates part of the uncertainty.
What If I Require Coverage for Events Prior to the Policy Period?
Continuous coverage is the key for events prior to the claims-made policy period. “Continuous coverage” refers to a series of policies continuously renewed without any gaps in coverage. If claims-made insurance coverage has been in place continuously since the start of a business, coverage would normally respond for claims made during the policy period related to events occurring during and prior to the inception of the policy period. The covered period prior to the inception of a claims-made policy is called “prior acts coverage” and is typically defined by the “Retroactive Date.” When a retroactive date is used in a policy, prior acts coverage is provided from the retroactive date through the current policy period.
What If I Require Coverage for Claims Made After the Policy Period?
Coverage for claims made after a policy period has ended are typically expected to be covered by a subsequent claims-made policy, but there are exceptions. One exception is when a claim has been made against the insured right at the end of the policy period, in which case most insurers will allow for a short time in which to report the claim to the insurer.
Key Aspects of Claim-Made Coverage
- Retroactive Date (also called “prior acts date”): As noted above, the retroactive date is an important component of a claims-made policy because it defines the period prior to a policy in which prior acts are covered. Claims related to events occurring after the retroactive date will be covered, but a claim which relates to an event occurring prior to the retroactive date will not be covered.
- Tail Coverage (also called “extended reporting period”): Tail coverage is coverage for claims which are made after a claims-made policy has expired that are related to events occurring before the policy has expired. Tail coverage lasting for several years after a policy expires may be purchased if a business shuts down or is sold.
- What is a claim? The definition of a claim in a claims-made policy is important and may be different than what you expect. Also, the definition of a claim can vary slightly between claims-made policies. A claim is typically defined as a written demand against the insured. For example, an email or letter received by an insured alleging an adverse event and asking for compensation would be defined as a claim.
- When is a claim made? A claim is considered made at the time the insured receives the claim.
- When should a claim be reported to the insurer? Immediately. Report a claim to your insurer immediately. Do not delay, as a delay may impair loss mitigation opportunities and in some cases void coverage. Do not spend excessive time gathering detailed information – report the claim to your insurer as soon as possible.
- Knowledge: You may realize that an event has occurred that could lead to a claim, but no claim has been made against you. Knowledge of an event which may lead to a claim should be disclosed on the current application for insurance, and in most cases should be immediately reported to your insurer. Some policies explicitly require reporting of an event that could lead to a claim in the future.
- Application Warranty: Most applications for professional liability insurance require some representation by the insured, and a signature, concerning prior claims and knowledge of any potentially adverse events. These application provisions should be considered carefully – they should not be taken lightly as insurers rely on these representations to consider and price the coverage.
- Coverage lapse: You should not let your claims-made insurance lapse, even for a short time, because underwriters will not typically cover prior acts when there has been a lapse in coverage. To do this, underwriters will typically reset the retroactive date to eliminate the prior acts coverage.
- Exposure Change: Material changes in exposure are important to underwriters and should be discussed with your underwriter as soon as possible.
Other Considerations
Acquisition or sale of a business: Professional liability insurance coverage changes related to a purchase or sale of a business can be complicated. Solutions are available as long as the issues are discussed and addressed early in the process. The typical solution is “tail coverage,” also called an “extended reporting period,” which provides protection for claims that relate to events prior to the expiration of the policy and are made after the claims-made policy has expired. Discuss these types of changes with your insurance representative and/or underwriter prior to closing.
Special situations: Many challenging situations can actually be favorably addressed through special coverages obtained from experienced underwriters. For example, special policies are often available to repair a lapse in continuous coverage and the loss of prior acts coverage.
Exposures, coverage needs, and policies vary. The comments on this website are a general resource, not a reference to any specific policy. Discuss your insurance needs and coverage with a representative such as eSpecialty Insurance.