What Is a Claims-Made Insurance Policy?
Navigate the critical timing aspects of claims-made insurance to secure your professional or business liability coverage effectively.
Insurance helps individuals and businesses manage financial risks. Understanding policy terms is important, especially for claims-made policies, which differ from other types. Knowing how a claims-made policy functions helps ensure protection against potential liabilities.
Defining Claims-Made Insurance
A claims-made insurance policy provides coverage if a claim is made against the insured and reported to the insurer during the policy period, or an extended reporting period. This means the timing of when the claim is brought and reported is the primary trigger for coverage, rather than when the incident causing the claim occurred. This contrasts with “occurrence-based” policies, where coverage is triggered by the date the incident happened, regardless of when the claim is reported.
These policies are commonly used for professional liability insurance, such as errors and omissions (E&O) insurance, and for directors and officers (D&O) liability insurance. This structure is prevalent in fields where a significant time lag can exist between an act, error, or omission and the subsequent claim.
Key Components of Claims-Made Coverage
Claims-made policies are defined by specific components that dictate the scope and limitations of coverage. These elements help determine when a claim will be covered.
Retroactive Date
The retroactive date establishes the earliest point in time an act, error, or omission must have occurred to be covered. If an incident happens before this date, the policy will not cover resulting claims, even if the claim is made and reported during the active policy period. This date is specified in the policy’s declarations and limits the insurer’s exposure to events that happened long before the policy’s inception. For first-time policies, the retroactive date is often the same as the policy’s inception date. It can be adjusted to an earlier date through negotiation, especially if continuous coverage was maintained with previous insurers.
Policy Period
The policy period refers to the specific timeframe during which the insurance policy is active. This period is usually one year, establishing the primary duration of the coverage agreement.
Reporting Period
The reporting period defines the timeframe within which a claim, once made against the insured, must be formally reported to the insurance company. Some policies may include a brief, automatic extension, such as 30 or 60 days, beyond the policy expiration for reporting claims that were made shortly before the policy ended. Failure to report a claim within this specified period can result in a denial of coverage, even if the claim otherwise meets the policy’s criteria. Therefore, policyholders should always prioritize timely notification.
Understanding Extended Reporting Periods
When a claims-made policy is not renewed, canceled, or replaced, an Extended Reporting Period (ERP) becomes relevant. Often called “tail coverage,” an ERP addresses potential coverage gaps for claims arising after the main policy expires. It provides an additional window to report claims to the insurer after the primary policy term has ended.
The purpose of an ERP is to protect policyholders from claims arising from acts or omissions that occurred before the policy ended but are reported after its expiration. This extension only affects the reporting window; it does not provide coverage for new incidents that happen after the original policy’s expiration date.
ERPs are needed when an insured entity ceases operations, merges with another company, retires, or switches from a claims-made policy to an occurrence-based one. Without an ERP, claims reported after the policy’s expiration for past acts would not be covered.
ERPs can be offered as a basic, automatic short-term extension (e.g., 30 or 60 days) or a purchased extension lasting several years. The cost of a purchased ERP can be substantial, sometimes approaching a significant percentage of the last annual premium.
Navigating Claims Under a Claims-Made Policy
Managing a claims-made policy requires understanding policyholder responsibilities when a potential claim emerges. The unique structure of these policies emphasizes prompt action and attention to coverage details. The timing of a claim’s reporting is important for activating coverage.
Timely reporting is important. Policyholders must report any potential claims or circumstances that might lead to a claim as soon as practicable. Delaying notification can jeopardize coverage. Insurers require prompt notice to investigate claims, and a significant delay can lead to a denial of coverage.
Changes in insurance coverage, such as switching insurers, non-renewal, or policy cancellation, have direct implications. If a policy is canceled without an Extended Reporting Period (ERP), there will be no coverage for claims reported after the cancellation date, even if the incident occurred while the policy was active. Maintaining continuous claims-made coverage, or securing an ERP upon termination, helps avoid coverage gaps for past acts.
Policyholders should review their policy’s specific terms, including the retroactive date and reporting requirements. Documenting and reporting any potential incidents to the insurer is advisable. This proactive approach helps ensure coverage is available when needed.