Claims-Made Insurance Policies

What is a claims-made insurance policy?
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.

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.