What Is a Claims-Made Policy and How Does It Work?

Insurance policies are contracts between an insurer and a policyholder, providing financial protection against unforeseen events. These agreements outline the specific circumstances under which the insurer is obligated to provide payment in exchange for regular premiums. While many types of insurance exist to mitigate various risks, a claims-made policy represents a distinct category with unique operational mechanics. This article will explore the specifics of claims-made policies, detailing their core features, contrasting them with other policy types, and outlining practical considerations for those who hold them.

Understanding Claims-Made Policies

A claims-made policy provides coverage when a claim is both made against the insured and reported to the insurer during the active policy period. This fundamental principle means that the timing of the claim’s reporting is paramount for coverage. Even if the event occurred before the policy began, the policy can still respond as long as the claim is first made and reported while the policy is active. For instance, if a professional service firm is accused of an error that happened five years ago, a current claims-made policy could cover the claim if it is first brought against the firm and reported to the insurer today. Conversely, if an event occurred during the policy period but the claim is not reported until after the policy has expired, that claim would generally not be covered.

This distinguishes claims-made policies from other insurance types where the occurrence date of the incident is the primary trigger for coverage. This type of policy is often utilized for professional liability exposures, such as errors and omissions (E&O) or directors and officers (D&O) insurance, where the discovery of a wrongful act and the resulting claim can be significantly delayed from the actual incident. The policy’s structure addresses this potential lag, focusing on when the demand for damages is formally made.

Key Features of Claims-Made Policies

Claims-made policies are characterized by specific features that delineate their coverage scope and duration.

Retroactive Date

A significant element is the retroactive date, which establishes the earliest point in time for an incident to be covered by the policy. Any claim stemming from an event that occurred prior to this specified retroactive date is typically excluded from coverage, even if the claim is made and reported during the policy period. For example, a policy effective January 1, 2024, with a retroactive date of January 1, 2020, would cover claims reported in 2024 for incidents occurring on or after January 1, 2020. This date is usually chosen to align with the policyholder’s continuous coverage history, if any, with previous insurers.

Extended Reporting Period (ERP)

Another important feature is the Extended Reporting Period (ERP), often referred to as “tail coverage.” An ERP provides a window of time after a claims-made policy expires during which claims can still be reported for incidents that occurred while the policy was active. This coverage is crucial when a policy is canceled or not renewed, as it bridges the gap for claims that may surface after the original policy term ends. The duration of an ERP can vary, commonly ranging from 30 to 60 days, or it can be purchased for longer periods, sometimes indefinitely, depending on the insurer’s offerings and the policyholder’s needs.

Reporting Requirements

The strict requirement for claims to be reported within the active policy period or an ERP is a defining characteristic. If a policyholder fails to report a claim within these specified timeframes, even if the incident occurred during the policy’s active dates, coverage may be denied. This emphasis on timely reporting necessitates vigilance from policyholders to ensure potential claims are promptly communicated to their insurer. The reporting requirements are detailed within the policy language, often stating that claims must be reported “as soon as practicable.”

Comparing Claims-Made and Occurrence Policies

Understanding claims-made policies becomes clearer when contrasted with occurrence-based policies, their primary counterpart in the insurance landscape. An occurrence policy fundamentally differs in its coverage trigger: it responds to incidents that occur during the policy period, regardless of when the claim is reported. This means that if an event happens while an occurrence policy is active, coverage will apply even if the claim is filed many years later, long after the policy has expired. For example, a general liability policy is typically written on an occurrence basis.

Claims-made policies prioritize the date the claim is made and reported, while occurrence policies focus on the date the incident causing the claim took place. This difference eliminates the need for a retroactive date in occurrence policies, as the coverage is tied directly to the date of the occurrence. Consequently, an occurrence policy does not typically require an Extended Reporting Period because the coverage for an incident is permanent once the incident occurs within the policy term. Consider a scenario where an alleged injury occurs in 2020. If the claim is filed in 2024: under an occurrence policy, the policy active in 2020 would respond, assuming the incident falls within its terms. However, under a claims-made policy, the policy active in 2024 would respond, provided the claim is made and reported during its term and the incident occurred after its retroactive date. This fundamental difference means that businesses or individuals selecting coverage must carefully consider the nature of their potential liabilities and how claims typically emerge in their field.

Practical Considerations for Policyholders

Timely Reporting

For individuals or businesses holding a claims-made policy, timely reporting of potential claims is paramount. Given that coverage hinges on the claim being made and reported during the policy period or an Extended Reporting Period (ERP), any delay could result in a denial of coverage. Policyholders should establish clear internal procedures to ensure that any notice of a potential claim, even if it seems minor, is immediately communicated to their insurer. This proactive approach helps avoid situations where a valid claim might go uncovered due to a reporting technicality.

Continuous Coverage

Maintaining continuous claims-made coverage is also highly important to prevent gaps in protection. When switching insurers or renewing policies, it is crucial to ensure that the retroactive date of the new policy aligns with or precedes the retroactive date of the previous policy. A mismatch in retroactive dates could leave a period of time during which incidents that occurred are not covered by either policy, exposing the policyholder to significant uninsured liability. Insurers will typically review prior coverage to ensure seamless transitions.

Policy Review and ERP Purchase

Policyholders should meticulously review their policy language, especially regarding the retroactive date and ERP provisions. Understanding these specific terms is essential for comprehending the full scope of coverage and potential limitations. If a policy is not renewed or is canceled, the decision to purchase an ERP, and for what duration, becomes a financial consideration. The cost of an ERP is typically a percentage of the expiring policy’s premium, often ranging from 100% to 300% for multi-year or unlimited tail coverage, depending on the desired length and the insurer. This upfront payment secures coverage for future claims arising from past acts.