Claims-Made Policies: Definition, Function, and Pros & Cons
AB
Summary:
A claims-made policy is an insurance policy that covers an insured for claims on active policies, regardless of when the claim event occurred. Businesses usually carry a claims-made or an occurrence insurance policy. A claims-made policy is a favorable option when there is a likelihood of delays between when claim events occur and when claims are filed. Some insurance companies offer limited versions of the claims-made policy, known as the claims-made and reported policy, which covers claims made against the insured and reported within a policy period. Occurrence policies cover the insured for claim events occurring during the life of the policy or a specific period, even if a claim is filed on an inactive policy.
What is a claims-made policy?
A claims-made policy is a unique type of insurance policy primarily designed to provide coverage when a claim is made against it, regardless of when the claim event actually occurred. This insurance option is highly favored, especially in situations where there may be a delay between when events transpire and when claimants decide to file their claims. It is particularly popular in the realm of business operations, offering vital protection against various risks.
Typical use cases
Claims-made policies are widely used to safeguard businesses from a variety of potential liabilities. For instance, they are commonly employed to cover errors and omissions (E&O) in financial statements, effectively protecting businesses from the consequences of financial mistakes. Furthermore, these policies extend their protective umbrella to encompass claims made by employees, including issues related to wrongful termination, sexual harassment, and discrimination.
Delayed claims
One of the distinctive features of a claims-made policy is its ability to cover claims made even if there’s a considerable gap in time between when the claim event occurs and when the claim is officially filed. This aspect is especially crucial when dealing with claims stemming from employment practices liability or actions of business directors and officers. Such liabilities may manifest months after the underlying events take place, making claims-made policies an essential safety net.
Claims-made and reported policies
Alternative coverage
In some instances, insurance companies may offer variations of the claims-made policy known as claims-made and reported policies. However, these are generally less desirable from a policyholder’s perspective. The key distinction lies in the requirement that claims must not only be made within the policy period but also reported during that period to be covered. This imposes a more stringent timeframe for coverage, which can be problematic, particularly in cases where there’s a significant time lag between the claim event and the actual filing of the claim.
Claims-made vs. occurrence policies
Different triggers
It’s crucial to understand the fundamental difference between claims-made and occurrence policies, as they form the cornerstone of liability insurance.
Claims-made policies
With a claims-made policy, coverage is triggered when a claim is made while the policy is in force. The insurance company is then obligated to defend the policyholder and cover the associated claims. This type of policy includes a specific period during which coverage applies, and any claims made within that timeframe are protected under the policy. It’s worth noting that claims-made policies offer a responsive approach, ensuring that as long as the claim is made while the policy is active, it falls under the coverage.
Occurrence policies
In contrast, occurrence policies rely on a different trigger mechanism. Instead of focusing on when a claim is made, they consider when the claim event originally occurred. Occurrence policies cover claims that arise from incidents that took place during a specified period, regardless of when the actual claim is made. This policy type doesn’t require a claim to be filed during the policy period. The critical factor is the timing of the underlying event that caused injury or damage.
Frequently asked questions
What is the primary advantage of a claims-made policy?
A claims-made policy offers flexibility when dealing with delayed claims. It covers claim events even if a considerable amount of time has passed between the event and the claim’s filing.
Are claims-made policies cost-effective?
Yes, claims-made policies often come with cost-effective premiums, making them an attractive option for many businesses.
What is the most significant drawback of claims-made policies?
One major drawback is the time-sensitive reporting requirement. Claims must be reported during the policy period, which can lead to issues if there’s a substantial gap between the claim event and the filing.
Can claims-made policies result in coverage gaps?
Yes, there is a potential for coverage gaps with claims-made policies, especially if a business doesn’t maintain continuous coverage.
Are claims-made policies only used for business insurance?
No, while claims-made policies are commonly associated with business insurance, they can also be used for various professional liability coverages. For instance, lawyers, doctors, and other professionals may opt for claims-made policies to protect themselves from claims related to their professional services.
Can I switch from a claims-made policy to an occurrence policy?
Yes, it’s often possible to switch from a claims-made policy to an occurrence policy, but this transition can be complex. The change may require purchasing “tail” coverage, also known as extended reporting coverage, to ensure continued protection for past incidents under the claims-made policy.
What is “prior acts” coverage in claims-made policies?
“Prior acts” coverage, sometimes referred to as retroactive date coverage, is a crucial element of claims-made policies. It specifies the date from which the policy provides coverage for claim events. Understanding and maintaining this date is essential to ensure continuous protection under a claims-made policy.
Key takeaways
- A claims-made policy covers claims on active policies, regardless of when the claim event occurred.
- It’s commonly used to protect businesses from delayed claims, such as those related to errors and omissions in financial statements.
- Claims-made and reported policies are a more restrictive version that necessitates both claim and report within the policy period.
- Occurrence policies cover claims based on when the claim event originally occurred during a specified period.
- Pros of claims-made policies include flexibility for delayed claims and cost-effective premiums.
- Cons involve time-sensitive reporting requirements, limited retroactive coverage, and potential for coverage gaps.
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