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:
-
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.
-
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.
This article was
prepared and made available to your agent by the Independent
Insurance Agents of Texas, which is solely responsible for its
content. Please read your insurance policy. If there is any conflict
between the information in this article and the actual terms and
conditions of your policy, the terms and conditions of your policy
will apply. The Independent Insurance Agents of Texas is a
non-profit association of more than 1,800 insurance agencies in
Texas, dedicated to helping its members succeed, in part by
providing technical resources that explain insurance policies sold
to their customers.
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