Explaining a “claims made” insurance policy
Two differing approaches are used by insurers to determine coverage when it comes to liability insurance — occurrence and claims made. The difference between the two is when the actual event that triggers coverage occurred.
Claims made coverage is triggered by an actual claim for damages, not a notice of an “occurrence” or “incident.” However, it is important to note that the date of the occurrence or incident must be more recent than the retroactive date of the policy. This retroactive date determines the cut-off date for claims: if the incident occurred before the retroactive date, the insurer has no obligation and the insured has no coverage. While the “claim” has to be “made” during the policy period, the occurrence which gave rise to the claim has to fall after the retroactive date of the policy.
A claims-made policy covers you for any covered claim provided it meets two criteria:
- You are insured when the claim is made. If you no longer need coverage, you can purchase a “tail” to protect you for the past.
- You have continually renewed the policy (coverage) from the time the incident occurred (the professional service you provided that is the source of the suit) until the time the claim is made.
In the following example a claims-made policy is purchased in 2007 and is renew every year. You provide service to Client X from 2008 to 2009. In 2011, Client X decides to sue for the services you provided in 2008 and 2009.
You are covered because:
- You are continuously insured up to when the claim is made and
- The services were provided after the policy started in 2007.
|Start Policy||Provide Service to Client X||Client X leaves firm||Client X sues firm|
It’s important to note that once a claims made policy lapses, it is as though it never existed. It is critical to avoid compromising retroactive coverage and to maintain continuous insurance coverage. Any claims or potential claims should be reported to the insurance company that has a policy in force at the time you are made aware of the claim. It is also useful to know that most professional liability insurance policies do not automatically renew.
About the Author
Lynne Ahearn is Senior Vice President at WGA, working with clients to provide innovative risk management and insurance advice to the Professional Services sector.