What is a Claims Made Insurance Policy?

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claims Question:

What is a claims made insurance policy?

Answer:

This is a great question, and one that our customers ask from time to time.

A claims made insurance policy is most often used to provide professional liability coverage, such as the coverage needed by lawyers and doctors to protect them from malpractice claims.  But it is also used frequently for other types of liability insurance, such as employment practices liability, directors and officers liability, and products liability.  It is sometimes used for the general liability insurance that all businesses purchase.

Most general liability insurance policies are written in a coverage format known as an “occurrence form.”  This type of policy covers accidents that occur during the policy period, no matter when the accident becomes known to the insured or is reported to the insurer.  This may result in the insurer providing coverage for accidents reported long after the policy has expired.

For example, a person could take a new drug today and not know for years that the drug has caused some type of injury.  If the injury is later discovered and that person sues the drug manufacturer, the suit will be defended and any resulting judgment will be paid by the policy that was in effect when the injury occurred, not by the policy that was in effect when the injury was discovered or the lawsuit was filed.

The period of time between the occurrence of injury and the actual reporting of the claim is often referred to as the long “tail” of liability insurance.

This time delay causes several problems for insurance companies.  They are often forced to pay claims with inflated dollars since the premium charged for the coverage was based on the loss experience data available at the time the policy was written, not at the time of the claim.  In addition, insurance companies may end up paying claims based on awards by a court system that is more liberal today than it was in previous years.

Finally, a covered accident or occurrence is not always a well-defined term.  Some occurrences take place over a period of years.  As a result, insurance companies may end up paying for a single claim using the limits of several policies over a number of years.

These problems with the occurrence form led to the development of the “claims-made” policy form.

The typical claims-made policy provides coverage for injury or damage no matter when it occurred as long as the claim against the insured is presented during the policy period.

Some claims made policies contain a “retroactive date” that precedes the effective date of the policy and allow coverage for acts that occurred prior to the policy period.  This is called “prior acts coverage.”

Some policies also allow an extended time period for the reporting of claims after the expiration date of the policy.  There could be a “basic extended reporting period” for a short amount of time, usually provided for no additional cost.  There could also be a longer “supplemental extended reporting period” made available for additional premium.

There are two potential coverage gaps when using a claims-made policy form:

  1. The insured may be without coverage for a claim filed after the policy expires if it is not replaced with a similar policy that provides prior acts coverage.  Since the claims-made policy responds only to claims that are made during the policy period, there would be no coverage for a claim arising out of an occurrence during the policy period but not reported until after the expiration of the policy or the extended reporting period.
  1. The policy will not respond to a claim arising out of an occurrence prior to the effective date or the retroactive date, even if the claim is reported during the policy period.

These coverage gaps can be avoided by careful attention of the insured and the agent.  Close attention to the retroactive date and the use of extended reporting period provisions will alleviate these problems.

Swingle, Collins & Associates specializes in claims made insurance coverage The descriptions of coverages listed on this website are brief and subject to the provisions, limitations, and exclusions that can only be expressed in your policy and related endorsements. For additional information of how Swingle, Collins & Associates can assist in meeting your coverage needs for claims made insurance please contact your dedicated risk manager to discuss the benefits and services of commercial insurance coverage.

The information contained on this page is provided for informational and educational purposes only. It contains general information on insurance issues and may not reflect the most current developments in insurance coverage and is unlikely to apply in all factual scenarios. The information does not include all the terms, coverages, exclusions, limitations or conditions that may be contained in the actual insurance contract language. The policies themselves must be read for those details. Sample policy forms will be made available upon reasonable request.