What does it mean to have a “Claims Made” Policy?
Insurance policies are primarily written on an occurrence basis or claims made basis. The most common of the two is occurrence simply because what you see (or pay for) is what you get – regardless of when a claim is filed the policy that was in force at the time of the claim would respond. An occurrence policy can be cancelled (no strings attached) and claims can continue to be filed if the claim occurred during the time the policy was in force.
The more complex of the two is claims made. Unlike the occurrence policy where the policy that was in force when the claim happened responds, for a claims made policy it is the policy that is in force when the claim is made. This is regardless of when the wrongful act that gave rise to the claim occurred, as long as the wrongful act did not happen prior to the retroactive date specified within the policy. A retroactive date is found in many claims made policies and the purpose is to eliminate coverage for claims that took place prior to a specified date.
Coverage remains in place as long as the premiums continue to be paid. Upon cancellation of a claims made policy (whether it be to move to a new carrier or coverage going forward is no longer needed) it is critical that you understand your options (carrying over your retroactive date or purchasing an Extended Reporting Period (ERP), also known as tail coverage) and how your actions can impact future coverage.
An Extended Reporting Period is a designated time period (common time periods: unlimited (until limits are exhausted), 1 year, 3 years, or 5 years) after a claims made policy has been cancelled in which you are able to make a claim against the policy. The additional premium for a claims made policy can vary (100% to 500% times the policies annual premium) and is typically due in full and within 30 days of the cancellation date.
If you are moving to a new carrier you may want to verify that your new insurance carrier will except/pick up your retroactive date (this would mean that the new carrier would now insure all your past exposures back to the specified retroactive date). If the new carrier is not willing to except the prior risk, you would then look to purchase an ERP. Your policy with the new carrier would then contain a new retroactive date.
If coverage is simply no longer needed going forward, you would look to purchase an ERP to ensure that you continue to have coverage for your past exposure. When situations like these occur, it is very important to understand that if you do not take the appropriate action you may be left without coverage.
Premiums for a claims made policy tend to be less expensive in the beginning and will increase as the exposure increases. This process of increased premiums is known as the claims made step factor. The process typically continues for the first five years and at the fifth year the policy is considered “mature” and the premiums level off.
Policies that you will typically see written on a claims made basis are: Professional Liability, Errors & Omissions, Directors and Officers, and Employment Practices Liability.
Please contact your agent if you have any questions.