Claims Made Policy – An Insurance Contract Based on Claims Timing
What if an error at your office caused a hefty lawsuit after your business insurance policy expired? With a claims-made policy, protection in such scenarios is possible.
TL;DR
- A claims-made policy is a contract that covers claims made during the policy period.
- By understanding its mechanics, insurance agencies can help clients navigate its complexities efficiently.
- Misunderstanding the policy timeline is a common pitfall causing coverage gaps.
- Awareness of retroactive dates and extended reporting periods provides a crucial win for agencies.
What Is a Claims Made Policy in Insurance?
For your clients, a claims-made policy is insurance that covers incidents as soon as they are reported or claimed during the active policy period.
Technically, a claims-made policy provides coverage for claims made or reported during the policy term, regardless of when the underlying wrongful act or incident occurred. Its specifics can be found on the declarations page or in the coverage form or endorsements. Claims-made policies are commonly seen in professional liability and errors and omissions insurance.
Key Related Terms to Know
- Claims-Made and Reported Policy – A variation of the standard claims-made policy that requires the claim to be reported within the policy period.
- Retroactive Date – The date after which an incident must occur for the claims-made policy to respond.
- Tail Coverage – An extension to the claims-made policy allowing reporting of claims after the policy period ends for incidents occurred during the policy period.
- Extended Reporting Period – Another term for tail coverage.
- Prior Acts Coverage – A feature that provides coverage for incidents that occurred before the policy was purchased.
- Aggregate Limit – The maximum amount an insurer will pay for all covered losses during the policy period.
Common Questions About Claims Made Policy
What makes a claims-made policy different?
A claims-made policy is unique because it covers claims based on their reporting date rather than the incident date. This is different from an occurrence policy which covers claims based on the incident date, regardless of when reported.
Is a claims-made policy better than occurrence insurance?
A claims-made policy isn’t inherently better or worse than an occurrence policy. They serve distinct needs. For businesses with long-tail risks, like doctors or engineers, a claims-made policy might be preferable as it allows them to report claims after a incident but during the policy period.
What is the impact of a retroactive date?
A retroactive date is a defining element of a claims-made policy. Prior acts coverage comes into play here – if the retroactive date is the same as the policy inception date, there is no prior acts coverage. For incidents that happened before the retroactive date, there won’t be any coverage.
Do claims-made policies come with a tail?
Claims-made policies typically offer tail coverage as an option. This allows policyholders to report claims for a certain period after the policy ends for incidents that took place during the policy.
How does the aggregate limit affect claims-made coverage?
The aggregate limit sets the maximum an insurance company will pay during the policy period. If this limit is exhausted, the policyholder is responsible for all additional costs, even if the policy hasn’t expired. This is critical to understanding when considering claims-made policies.
Claims Made Policy vs. Occurrence Policy
The main difference between a claims-made policy and an occurrence policy lies in the “trigger” for coverage.
Comparison Area | Claims Made Policy | Occurrence Policy
|
Primary use case | Long-term risks that might take years to manifest, like malpractice lawsuits | Risks that materialize immediately or shortly after the occurrence, like personal injuries |
Coverage / concept type | Claims-based coverage | Event-based coverage |
Typical exclusions | Acts before the retroactive date | Any incidents reported after the policy ends |
Who is most affected by errors | Professionals like doctors, lawyers, engineers | Businesses like stores, gyms, manufacturing facilities |
Common mistakes | Assuming coverage for acts before the retroactive date, ignoring the policy limits, forgetting to purchase tail coverage | Assuming continuous coverage even after policy expiration |
Real Claim Examples Involving Claims Made Policy
Scenario 1: A law firm purchased a professional liability insurance policy with a claims-made form. One of their partners made a critical mistake on a case two years ago, and the client decided to sue recently. Because they had a claims-made policy in place, the claim was covered, highlighting the policy’s ability to provide protection long after pertinent work was done.
Scenario 2: An engineer firm missed an essential calculation in their design, which resulted in a severe structural issue.
Years later. The mistake was made during the active period of their claims-made policy, but the claim was filed post policy expiration. Unfortunately, they didn’t purchase tail coverage, and the policy couldn’t respond to the claim.
Scenario 3: A medical professional committed an error before the retroactive date of a claims-made malpractice insurance policy. When the patient filed a suit, the insurance company denied coverage citing the retroactive date clause. This validates the significance of understanding retroactive dates.
Limitations and Common Mistakes
- Claims-made insurance doesn’t cover incidents occurring before the retroactive date.
- Many clients often neglect the tail coverage, leaving a gap after policy expiration.
- Misinterpretation of aggregate limits can exhaust coverage prematurely.
- Misunderstanding the relation between ‘the policy period, reporting period and occurring period’ often leads to unwanted out-of-pocket scenarios.
How to Explain Claims Made Policies to Clients
For Personal Lines clients, “A claims made policy is like a safety net. Even after your policy has ended, if someone sues you for something that happened while your policy was active, you’re still covered.”
For Small Business owners, “With a claims made policy, your work from years ago is protected as long as the claim is made during the policy period. It’s a great way to protect yourself against delayed lawsuits and claims.”
For CFOs or Risk Managers, “A claims made policy is essential for managing long-term risk, especially when facing potential lawsuits. Combined with tail coverage, it can protect your business from claims made years after the policy period.”