See Client Communication article Claims-Made Policies.
Most management liability policies are written in a coverage format known as a "claims-made” form.
In its pure form, a claims-made liability policy provides coverage for a claim made against the insured during the policy period when the claim arises out of a covered wrongful act that causes harm to a claimant.
With this simple concept, it doesn't matter when the insured committed the wrongful act, it doesn't matter when the claimant suffered the harm, and it doesn't matter when the insurance company receives notice of the claim.
This differs significantly from an occurrence type of liability policy, which provides coverage for a claim if the injury to the third party occurs during the policy period. The occurrence policy covers the claim even if the injured party makes a claim against the insured after the end of the policy period.
The simple concept of a claims-made policy, however, is modified by features that make such policies troublesome for agents who don't handle them on a regular basis, including prior claims exclusions, retroactive dates, claims reporting conditions, and extended reporting period ("tail") provisions.
Prior Claims Exclusions
The insurer writing a claims-made policy is at a disadvantage if the insured has already committed a wrongful act that will later cause harm to a third party, since the policy covers any claim that is made during the policy period. This is a significant problem for the insurance company if the insured -- or someone who works for the insured -- knows that a wrongful act was committed prior to the inception of the policy.
To overcome this problem, insurers ask very pointed questions during the application process about prior claims and incidents that might give rise to future claims. Some companies make the application a part of the policy with a provision that voids coverage if the insured makes a misrepresentation -- intentional or otherwise -- on the application.
If the applicant reveals a prior claim or incident that wasn't already reported under a prior policy, the policy may include a specific exclusion to preclude coverage for that claim or a future claim that might arise out of the incident.
A "retroactive date" is generally established when the insured first purchases a claims-made policy. When there is a retroactive date on the policy, there is no coverage for claims that are based on wrongful acts committed prior to that date. Subsequent policies -- whether written by the same or another carrier -- should use the same retroactive date, thereby maintaining coverage for wrongful acts committed by the insured earlier than the effective date of the policy but which are unknown to the insured at the inception date of the policy.
When a claims-made policy contains a "retroactive date" that precedes the effective date of the policy, the policy provides "prior acts coverage." A policy that does not contain a retroactive date is providing "full prior acts coverage."
If the retroactive date is advanced to a later date on a subsequent policy, the insured will have a gap in coverage, unless the insured purchases extended reporting (tail) coverage - see below.
Claim Reporting Provisions
The simple claims-made concept requires only that the claim be made against the insured during the policy period. Some claims-made policies also require the insured to report that claim during the policy period in order for the claim to be covered. This is called a "claims-made and reported" policy.
A claims-made policy without this requirement is referred to as a "pure" claims-made policy, generally requiring only that the claim be reported "as soon as practicable."
A policy that allows an extended time period after expiration to report claims (typically from 30 to 90 days) is referred to as a "modified claims-made-and-reported" policy. If a claim is not reported to the proper carrier within the specified time frame, the claim may not be covered.
In addition, most policies define a "claim" such that it must be a written demand from a third party. If the insured knows a wrongful act has been committed, but the third party hasn't yet made a written demand, most policies permit the insured to report the incident as a "potential claim" and preserve coverage under that policy for a subsequent claim.
Extended Reporting (Tail) Coverage
When a claims-made-and-reported policy is canceled or expires, or when a new insurer advances the retroactive date to the inception date of the new policy, the insured loses the right to report a claim even if the claim is made against the insured prior to the termination date.
With a "modified claims-made-and-reported" or "pure" claims-made policy, the insured has extra time to report a claim made during the policy period.
But all claims-made policies require that the claim be made against the insured during the policy period, thus providing no coverage for a claim made after the policy terminates without being renewed or rewritten on the same terms and conditions, even if the claim is based on a wrongful act committed during the policy period.
Claims-made policies, therefore, contain a provision that permits the insured to pay additional premium to gain the right to report a claim made against the insured after the policy terminates.
This extended period of time to report a claim is called "tail" or "extended reporting" coverage. This right must be exercised in accordance within a limited time-frame and conditions shown in the policy.
Most policies allow the insured to purchase tail coverage when either the insured or the insurance company cancels or declines to renew, but some policies allow that right only when the company cancels or declines to renew.
Procedures for Avoiding E&O Claims When Selling and Servicing Claims-Made Policies
The unusual features described above create E&O flash-points for agents who sell and service claims-made policies. These flashpoints can be addressed by using checklists for each step of the selling and servicing process.
Checklists For Claims-Made Policies (pdf)