Overview
A claims made insurance policy provides coverage for incidents that occur during the policy period, as long as the claim is made during this period. If the event causing the claim occurred during the policy period, it must be reported during this period to ensure coverage, unless the insured decides to purchase extended reporting windows.
Understanding claims made insurance policies is crucial for businesses and professionals because it directly affects their liability protection. Compared to
occurrence policies, which cover incidents that happen during the policy period regardless of when the claim is made, claims-made policies require active coverage at the time the claim is filed. This means that professionals must maintain continuous coverage without lapses and consider retroactive dates and extended reporting periods to ensure they are protected against potential claims arising from past services. This understanding helps in managing risks, ensuring compliance with industry requirements, and avoiding gaps in coverage that could lead to significant financial and legal consequences.
Essential terms
Policy Period - The policy period is the specific duration of time during which an insurance policy is active and provides coverage. For a claims made insurance policy, this is the timeframe in which incidents must occur and be reported to be eligible for coverage. The policy period is defined by the start and end dates listed in the insurance contract. If an incident happens within these dates, the policy will cover the claim, only if the claim is filed before the policy period has expired.
Retroactive date - The retroactive date is the date from which coverage begins. Claims arising from incidents that occurred before this date are not covered, even if the claim is made during the policy period. The retroactive date ensures that the policyholder is not liable for incidents that happened long before they purchased the policy.
Extended Reporting Period (ERP): Also known as "tail coverage," an ERP allows the policyholder to report claims after the policy has expired, as long as the incident occurred between the retroactive date and the policy expiration date. This is particularly useful for professionals who are retiring or switching policies and want to ensure they are protected against late-arising claims.
Who uses claims made policies?
Legal Professionals - Lawyers and law firms often use claims-made policies for
professional indemnity insurance (also known as legal malpractice insurance). These policies protect against claims of negligence or errors made during the course of providing legal services.
Medical Professionals - Doctors, surgeons, nurses, and other
healthcare practitioners typically use claims-made policies for medical malpractice insurance. These policies cover claims of medical errors, misdiagnoses, and negligence.
Financial Services -
Accountants, auditors, financial advisors, and investment consultants use claims-made policies to cover professional liability and errors & omissions (E&O) insurance. These policies protect against claims arising from financial advice, investment management, and accounting services.
Real Estate - Real estate agents, brokers, and property managers use claims-made policies to cover errors & omissions insurance. These policies protect against claims related to property transactions, management issues, and misrepresentation.
Tech Professionals - Software developers, IT service providers, and cybersecurity consultants use claims-made policies to cover professional liability and E&O insurance. These policies protect against claims arising from software failures, data breaches, and service disruptions, and can be covered under
cyber insurance policies.
Claims-made policies are essential for various professionals and businesses where the risk of professional liability claims is high. Understanding the specific needs and risks associated with these professions helps in selecting appropriate coverage to ensure comprehensive protection against potential claims.
Important considerations
Extended reporting periods (ERPs) - ERPs, also known as tail coverage, extend the time during which a claim can be reported after the policy has expired or been cancelled. Essential for ensuring that claims arising from incidents during the policy period can be reported even after the policy ends. Businesses should consider purchasing ERPs when changing insurers, discontinuing a particular line of coverage, or when the risk of delayed claims is significant.
Coverage Limits - Evaluate the maximum amount the insurer will pay per claim and in total during the policy period. Ensure the limits are sufficient to cover potential claims. Consider worst-case scenarios and industry practices to determine appropriate limits. Review and understand any exclusions or limitations in the policy that could affect coverage.
Retroactive Dates - The retroactive date is the date from which incidents are covered, even if a claim is made later. It marks the start of the coverage period for past acts. Ensure that past incidents, occurring before the policy's start but after the retroactive date, are covered. Ensure the retroactive date is set as early as possible to cover all relevant past incidents. When switching insurers, maintain continuity by ensuring the new policy honours the original retroactive date.
Exclusions
Claims-made insurance policies often contain exclusions that limit or deny coverage for certain types of claims or circumstances. Understanding these common exclusions is crucial for businesses to ensure they have adequate coverage. Here are some typical exclusions found in claims-made policies:
Known claims – Claims arising from circumstances known to the insured before the policy's inception are typically excluded. If the insured was aware of a potential claim before obtaining the policy, coverage would not apply.
Prior acts - Claims based on acts, errors, or omissions that occurred before a specified retroactive date are excluded. This emphasizes the importance of setting an appropriate retroactive date.
Fraudulent acts - Claims resulting from fraudulent, dishonest, or criminal acts committed by the insured are generally excluded. Coverage is intended for negligent acts, not intentional misconduct.
Contractual Liabilities - Claims arising from the insured's contractual obligations are often excluded unless the liability would have existed absent the contract. This prevents the policy from covering breaches of contract unless they result from professional negligence.
Employment practices - Claims related to
employment practices, such as wrongful termination, harassment, or discrimination, are excluded unless the policy specifically includes Employment Practices Liability Insurance.
Regulatory and Government actions - Claims resulting from regulatory investigations, fines, or penalties imposed by government bodies are generally excluded.
Professional services not covered - Claims arising from professional services not specifically listed or covered under the policy are excluded. It’s crucial to ensure that all relevant services are included in the policy.
War and terrorism - Claims resulting from acts of war or terrorism are typically excluded. These risks are often covered under specialized policies.
