Claims-Made Coverage
Specialty liability policies, such as Employment Practices Liability, Directors’ & Officers’ Liability, and Professional Liability, are typically available only on a claims made coverage basis v. occurrence coverage.
Claims- made policies have several coverage provisions that are distinctively different from occurrence coverage policies. The following discussion is intended to highlight the key features of claims- made coverage that differ from the more traditional occurrence basis coverage. It is crucial that the insured understand and comply with the claims-made
provisions for coverage to apply.
Occurrence Policies – Coverage Trigger
Standard liability policies, e.g., General Liability, are written on an occurrence coverage basis. Coverage under an occurrence policy applies if the injury or damage occurs during the policy period, regardless of when a claim is brought against the insured. If the date of the injury or damage falls within the policy term, the policy will respond even if the injury or damage is discovered or a claim is made after the policy expires.
Claims-Made Policies – Coverage Trigger
Claims- made policies provide coverage for losses arising from a claim first made against the insured during the policy period. Coverage is triggered not by the date of the wrongful act (i.e., injury or damage), but by the date of the claim that results from the wrongful act.
The phrase “claim first made” means that coverage will not apply if the claim had already been made against the insured prior to the policy period. A claim is “made” when the insured receives notification of a demand for money or services.
Claim Reporting Provisions
Most claims-made policies also include a reporting provision that the insured must comply with for coverage to apply. The policy will respond only if a claim is first made against the insured and reported to the insurance company during the policy period or a defined reporting period.
The defined reporting provision varies by policy, but typically includes an additional period of 30 or 60 days after the policy expires during which the insured can report a claim. The claim must still have been made against the insured during the policy period. If the claim is made during the 30 or 60 day reporting period, coverage will not apply.
Definition of Claim and / or Incident for Reporting Purpose
The definition of a claim differs from policy to policy, but generally will specify a “written” demand received by the insured. However, the Reporting Provision of the policy will likely include wording instructing the insured to also report incidents or circumstances that reasonably could give rise to a claim under the policy. Once an incident is reported to the insurer, any subsequent claim arising out of that incident will be considered a “claim first made” under that policy.
Retroactive Date Provision
The retroactive date of a claims- made policy is another important feature that can determine if a claim is covered or not. The retroactive date is usually the inception date of the first claims- made policy purchased by an insured. In order for coverage to apply, the wrongful act must occur on or after the policy’s retroactive date.
Continuity of Coverage
If the insured has renewed a claims- made policy, the original retroactive date should remain the same date in order to maintain continuity of coverage. The following scenario will illustrate the importance of continuity of coverage under a claims-made policy:
1st Claims-made policy term: 1/1/99-00
Retroactive date: 1/1/99
Renewal policy term: 1/1/00-01
Renewal policy retroactive date: 1/1/99
Wrongful act occurs on: 5/1/99
Claim first made on: 5/1/00
In this scenario, the renewal policy would respond to the claim because:
· The wrongful act took place after the retroactive date, and
· The claim is first made against the insured during the renewal policy term.
But if the retroactive date on the renewal policy had been moved forward to 1/1/00, there would have been no coverage under either policy because:
· The claim was made (5/1/00) after the first policy expired (1/1/00); and,
· The wrongful act took place (5/1/99) prior to the retroactive date (1/1/00) of the renewal policy.
Additional Examples of Claim Scenarios under a Claims-Made and Reported Policy with a Retroactive Date and a 60 Day Reporting Period:
Case #1 - Coverage would apply:
Policy Term: 1/1/99 – 1/1/00
Retroactive Date: 1/1/99
Claim Reporting Deadline: 3/1/00
Wrongful Act occurs on: 3/1/99 (wrongful act took place after the retro date)
Claim is made on: 9/1/99 (claim made during the policy term)
Claim is reported to insurer on: 11/1/99 (claim reported during the policy term)
Case #2 - Coverage would apply:
Policy Term: 1/1/99 – 1/1/00
Retroactive Date: 1/1/99
Claim Reporting Deadline: 3/1/00
Wrongful Act occurs on: 3/1/99 (wrongful act took place after the retro date)
Claim is made on: 9/1/99 (claim made during the policy term)
Claim is reported to insurer on: 3/1/00 (claim reported within 60 day reporting period)
Case #3 - Coverage would not apply:
Policy Term: 1/1/99 – 1/1/00
Retroactive Date: 1/1/99
Claim Reporting Deadline: 3/1/00
Wrongful Act occurs on: 3/1/99
Claim is made on: 9/1/99
Claim is reported to insurer on: 5/1/00 (Claim reported after 60 day reporting period)
Extended Reporting Period (also known as a Discovery Clause)
If a claims-made policy is non-renewed or cancelled, the insured usually has the right to purchase an Extended Reporting Period (ERP) for an additional premium. The additional premium is typically a percentage of the annual premium. Extended reporting periods are typically from 1 to 3 years.
The ERP allows the insured to report claims that are made after a policy has expired or been cancelled. However, the wrongful act still must have taken place prior to the policy expiration or cancellation. If the wrongful act occurs during the Extended Reporting Period (i.e., after policy termination), the policy would not cover any resulting claim.
Summary
The unique features of claims-made coverage need to be carefully examined and understood in order to protect the insured’s interests.
To summarize, the following 3 conditions must be met for coverage to be triggered under a typical claims-made policy:
1. Retroactive Date Requirement: The wrongful act that results in a claim must occur on or after the retroactive date.
2. Claims-Made Requirement: The claim must be first made against the insured during the policy term.
3. Reporting Requirement: The claim must be reported to the insurance company within the policy term or the reporting period of the policy.
Disclaimer: The above theoretical claim scenarios do not reflect any possible affect of policy conditions, exclusions, terms or other factors which may impact whether or not a specific claim would be covered under any claims-made policy.