What Is a Claims Made Form and How Does It Work?

A claims-made policy is an insurance coverage designed to protect against liability for incidents that occur on or after a defined date, known as the retroactive date. This form of policy provides coverage only if the claim is first made against the insured and reported to the insurance company during the active policy period or an extended reporting period. It is distinct from other insurance types because the crucial factor for coverage is when the claim is reported, rather than when the actual incident took place.

Understanding the Claims-Made Trigger

Coverage under a claims-made policy is triggered when a claim is first made against the insured and reported to the insurer. Both of these actions must occur while the policy is in force. If an incident occurs during the policy period but the claim is not reported until after the policy expires, there typically would be no coverage unless specific extensions are in place. The date of the actual incident is secondary to the date the claim is officially reported to the insurance carrier.

For instance, if a professional liability claim stems from advice given years ago, the claims-made policy in effect when the client first notifies the professional and when the professional reports it to their insurer, is the policy that would respond. Without timely reporting, even valid claims for past acts may not be covered. This underscores the importance of continuous coverage and prompt claim notification for policyholders.

Essential Policy Components

Claims-made policies incorporate the retroactive date and the Extended Reporting Period (ERP). The retroactive date establishes the earliest point in time for which an incident can occur and still be covered under the current policy. Any incident that took place before this specified date, even if a claim is made and reported during the active policy period, will not be covered by the policy. This date often aligns with the inception of the first claims-made policy purchased by the insured, ensuring continuity of coverage for prior acts.

An Extended Reporting Period (ERP), commonly referred to as “tail coverage,” is another feature. It allows claims to be reported for a set duration after a claims-made policy has expired, provided the incidents occurred while the original policy was active and on or after the retroactive date. This coverage is particularly important when a policy is canceled, not renewed, or replaced, as it bridges the gap for potential future claims arising from past work. Purchasing an ERP typically involves a one-time payment, which can range from 150% to 300% of the last annual premium, with a common cost being around 200%.

The duration of an ERP can vary significantly, with options ranging from one year to unlimited terms, though common durations include one, two, three, or five years. Longer ERPs generally incur higher costs. Some policies may offer a short, automatic ERP (e.g., 30-60 days) at no additional cost upon cancellation or non-renewal. For more comprehensive protection, a supplemental ERP must be purchased, ensuring that claims for prior acts can still be reported even after the primary policy period has concluded.

Claims-Made Versus Occurrence Policies

A claims-made policy is activated when a claim is first made against the insured and reported to the insurer during the policy period. If the policy expires and no ERP is in place, claims reported afterward, even for incidents that occurred during the policy term, may not be covered.

Conversely, an occurrence policy provides coverage based on when the incident occurred, regardless of when the claim is reported. If an incident took place during the policy period, coverage applies even if the claim is not filed until many years later. The policy in effect at the time of the incident is the one that responds, even if the policyholder has since changed insurers or ceased operations.