Claims-Made Policies

Some recent inquiries have made us aware that it may be time to review the nuances of claims-made policy forms once again. Here is how Occurrence Policies respond to claims, as opposed to how claims-made policies respond. It is important to understand the differences.

Occurrence Policies

This is the insurance coverage form with which most people are familiar.  Most Homeowner, Auto and Commercial General Liability policies are written on an “occurrence” basis. Coverage is triggered based upon when the incident (accident, injury, damage) actually happened.

The policy, in force on the date of the incident, is the one which responds to the claim, regardless of when the claim is actually presented to the insurance company. That policy must respond to the defense expenses (legal costs) and settlements or judgments. Years after a policy expires, a claim could arise, and the policy in effect at the time of the loss event must still respond.

Claims-Made Policies

These are commonly used for Professional Liability Policies for medical professions, attorneys, accountants, insurance agents and title insurance industry professionals. Coverage is triggered by the date the insured first became aware of the possibility of a claim and when one notifies the insurer of this knowledge. The insurance policy, in force on the date the insured gained this awareness and reports this information, is the one that responds to the claim. This is where the retroactive date (or prior acts date) becomes of paramount importance. The policy period, for a claims-made policy, will extend back in time to a retroactive date which may be years before the current policy was purchased and in effect.

Therefore, (1) the claim must be reported during the policy effective dates or before the expiration of any Extended Reporting Period (ERP) specified in your policy (common ERP time frames are 30 to 60 days – check your policy), and (2) the incident causing the claim has to have happened within the policy period or since the retroactive date specified in your policy. For example, if the event causing the claim occurred in June of 2003, and your retroactive date goes back to December of 2003, your policy will not respond to that claim, since the claim originated from an event prior to your retroactive date. Thus, one rule to remember is to never change the retroactive date of your policy.  Sometimes, when considering a change in insurance companies, the new carrier will offer to advance the retroactive date of your new policy to the new policy’s effective date. This offer sounds enticing because it will significantly reduce your premium cost. However, you will lose coverage for any losses that stem from acts that occurred between the date of your first claims-made policy (your prior retroactive date) and the start date of this new policy. You will essentially be throwing away all the coverage you paid for during those prior years. This loss of your retroactive date should be avoided at all costs. You should make certain that any new carrier honors the retroactive date of your previous policy.

Here is another way by which you may “lose” your retroactive coverage. Those that finance their premium when paying for their E&O policies are finding that companies have become willing to cancel policies for non-payment of premium far more rapidly than in prior years. Once cancelled, the retroactive date is simply gone. The new policy has a new retroactive date, and all the coverage that has been paid for has vanished. It is imperative not to let that happen to you. If you have financed your premium, please be mindful of cancellation notices. Now, more than ever before, those should not be ignored and should be addressed immediately. The cancellation of your policy, for non-payment of premium, will likely mean you have lost your retroactive date.

Another item to be mindful of is prompt claims reporting. Once aware of a claim incident, it is wise to put your carrier on notice as soon as is practicable so that a claim may be submitted. Once you have been given paperwork confirming the suit, you should forward it to your broker and the company immediately. If you are uncertain what to do with something that may become a claim incident, but has not actually been presented to you, call us to discuss it. We will help you to determine your best course of action.

One last item to note regarding claims-made policies. Oftentimes, your application becomes part of the policy and, even if it is not incorporated into the policy, the warrantees within your application are taken into consideration in the event of a claim. Therefore, be mindful of this when completing your application, and be sure it is an accurate representation of your company’s overall operations. A misrepresentation within the application could potentially cause a denial of coverage.

Your claims-made E&O policy, while somewhat complex, only has to be dealt with once a year. A knowledgeable business owner or manager, working closely with the knowledgeable insurance professionals at the Merriam Agency, will help simplify the process and assure you of continuous, proper coverage.

Jennifer Holt, ACSR
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