Understanding Claims-made Insurance Policies
Author: Jack Compton, Advisor, Shea Barclay Group
The vast majority of professional liability insurance policies are written in what is known as a “claims-made” form. Claims-made policies are drastically different than an “occurrence” based policy that most insurance buyers are familiar with, such as automobile or homeowners insurance. With an occurrence policy, there simply must be coverage in place when an accident occurs. Think of calling your car insurance company when you purchase a new car and are at the dealership, giving them the VIN number, and then you sadly get rear-ended a mile down the road. You would have coverage, because coverage was put in place before the accident “occurred”. With a claims-made policy, the very nature of professional services means that one may not be aware an error or omission has transpired for a long period of time. Thus, the key coverage trigger is when there is knowledge of a potential claim and when notification is provided to the carrier.
A claims-made policy provides coverage to the named insured for work performed back to a specified date, known as the retroactive date. This date is typically when the entity was formed and/or coverage was first purchased, but often times differ for various reasons. Although coverage is provided for work back to the retroactive date, a crucial date in whether coverage will be afforded is when the insured had knowledge of the error or omission. If the insured went through a renewal period and did not disclose a matter that they had knowledge could give rise to a claim, coverage will likely be denied.
The primary need for these policies to be written as claims-made is that often times a claim is not discovered until well after the work in question was performed, sometimes years or even decades. This is commonly referred to as the “tail” by insurance underwriters, meaning the previously performed work that they would be insuring. A real-life example of a legal malpractice case with a long tail would be an attorney that creates a will for a 50 year old individual. The client then passes away some 30 years later, and a crucial mistake is discovered in the drafting of the will, causing monetary damages to the individual’s estate. Tracking down the policy that was in force when the work was performed would be unrealistic, not to mention that the insurance company that wrote the policy may not even still be in business! If the law firm that performed the work maintained prior acts coverage and still had a policy in place, coverage would be afforded under their current policy.
While most understand the difference between occurrence and claims-made, there are further intricacies within a claims-made policy and their reporting requirements. All policies have slightly different reporting requirements, so it is important to read it carefully and consult with your broker. One of the easiest ways for an insurance company to wiggle out of paying a claim is for a late reporting notice.
A “claims-made policy” will typically include language to the effect of, “as soon as practicable” when referencing when a claim should be reported. That is obviously vague wording that the insured can use to their advantage if a claim were ever denied for late reporting. A “claims-made and reported policy”, which is far more common in professional liability, will typically include language to the effect of, “this policy applies only to those claims that are both first made against the insured and reported in writing to the Company during the policy period.” Again, this gets back to the crucial renewal process and the need to disclose all potential matters before a new policy takes effect.
Continuity of coverage is a provision found in some policies, which may benefit the insured in this instance. It provides incentive to not switch carriers, and essentially says the company will cover claims back to when the policyholder was first insured by said company, even if a matter was not disclosed during a subsequent renewal process. Companies are becoming far more reluctant to offer this coverage for obvious reasons.
Another nice provision found in some policies is limiting knowledge of a claim to the executive committee of a firm, rather than every lawyer. This is particularly attractive for larger firms. Take a 120 lawyer firm – it is certainly to their advantage to have knowledge of a claim limited to a five person executive committee as opposed to all lawyers in the firm. Some companies will agree to provide bordereau reporting provisions – meaning an insured can provide a summary of all potential matters in agreed upon time increments (usually every three or six months). It prevents firms in a practice area with a high frequency of claims from having to report matters on a constant basis.
It is important to remember that an insurance policy is a contract between the company and the policyholder. Every word in the policy has been carefully scripted and drafted for a specific purpose. Insurance companies have a difficult enough time turning a profit; they certainly are not going to cover claims that by definition are excluded under the language in the policy. As is good advice in nearly anything – read the fine print! When in doubt, consult with your broker. It is always better to be safe than sorry.