Exclusively from Foa & Son
Claims made policies have become ubiquitous. Formerly found only in certain specialized niches, these days many common and necessary policies are written on these forms. Employee benefits liability, employment practices, cyber, fiduciary, as well as D&O, E&O, and most forms of professional liability are almost always written on claims made forms. These days most organizations will have at least a couple of claims made policies in their insurance portfolio.
Unfortunately, most insurance buyers are still a bit cloudy about the significant differences between claims made policies and the far more common occurrence based liability policy forms they are familiar with. In particular, the key difference between the coverage trigger in a claims made policy, the claim (and not the occurrence that leads to a claim as in occurrence policies) presents significant challenges to properly managing these policies that policyholders need to understand.
Claims made policies are all nonstandard policies and can vary in significant ways, but in general they cover claims that are first made against the policyholder and reported to the insurance company while the policy is in force. No coverage may exist for a claim made against the policyholder during the policy period but not reported to the insurance company after the policy expires, thus, the danger zone. They also generally exclude claims arising out of prior and pending litigation, incidents reported to prior insurers as well excluding claims for which the named insured had prior knowledge of circumstances that may give rise to a claim.
Consider the practical implications of all this. Imagine your claims made policy with an expiration falling on a weekend or holiday. You are in the parking lot on a Friday afternoon getting into your car to head home when you are served with notice of a claim; how do you report that to the insurance company during the policy period? Or, you are sick, or out of town, or on vacation when a claim comes in the mail; will your staff know what to do with it and how to respond? In fact, there are many good faith reasons why you might not be able to report a claim to the insurance company within the policy period; does that mean no coverage?
Most claims made policies do contain a basic extended reporting period provision. These will typically provide an additional 30 or 60 days to report a claim first made against you during the policy period, and one could hope that would cover the situations described. Here’s the catch, though…these provisions are frequently limited only to situations when the policy is cancelled or non-renewed. If you renew? No extended reporting period. Think about that for a minute. You don’t renew your claims made policy, you fire your insurance company, and you get a free extended reporting period. Or, you’re a good customer, you renew your policy…and you don’t. The insurance company treats the customers they lose better than the customers they keep.
While on this subject there is one more red flag to beware of, that in the definition of “claim”. Insurance policies all have a section with definitions of key terms, and the definition of a claim in a claims made policy is a very important one. A claim will typically be described as a demand, proceeding, request and so forth, written, oral or either. What is frequently missing is any requirement that the insured have notice of it. A lawsuit might be filed or a proceeding initiated which would trigger coverage, but the actual documentation might not hit your desk until several weeks later. How are you supposed to report a claim you don’t even know about?
The lesson for all this is that any claims made policy renewals, even routine ones, need to be approached with caution. You should be on alert for any potential claims starting about 60 days out from renewal, and on high alert in the week or ten days prior to renewal. If you are unsure how any of this applies to you, give us a call.