By Angela Schroder, President of U.S. E&O Brokers / Senior VP of Insurance Agent Programs
Claims Made Coverage Forms: What are you thinking?
In the past two months, we have heard some interesting comments. Where are insurance agents getting their information on professional liability insurance they buy for themselves and they sell for their customers?
Claims Made Policies are part of the history on how to build a product that can withstand time. Agencies in business for 50 years still have coverage for wrongful acts that may have occurred 50 years ago. Why? Because as long as they have coverage for prior acts, their current carrier will defend the E&O Claim.1
Why is this important? Insurance carriers get bought, sold, and go insolvent. If you look back 50 years, you will find some E&O carriers are not even in business, others have been purchased and are no longer in the professional lines industry. The creation of a claims made form creates the duty to defend and pay on behalf with their current carrier
The history of the policy form began in 1964 and came into the real market place in 1976. Claims made policies allow the current E&O insurance carrier to defend you from acts back to the date you can prove you had consecutive E&O coverage.
Here are some actual comments:
I do not need any prior acts coverage for my past five years in business. I want to save money by only binding coverage the for next year only. I want a retro date inception coverage
I want an occurrence policy form because I will be able to go back to each policy year and report a claim if I have one in the future.
We are not here to debate what you think or rumors you heard, but to discuss these comments in the context of how to defend your agency, your work family and your family if you have a devastating claim.
Claims Made and Reported Policy Form or Claims Made Policy Form, Defined
According to International Risk Management Institute (IRMI), a resource for definitions that are industry wide, claims made policy is “a type of policy that a claim must be made during the policy period for coverage to apply.”
The claims can relate from the errors as of the retroactive date on your coverage to the expiration date of your current policy. Some policies offer additional time to report claims after the expiration; however, all claims should be reported prior to renewing coverage. So regardless of when the error occurred, you would have coverage from prior acts date on your policy to the expiration date.
The purpose of a claims made form is to provide coverage for wrongful acts on errors that may not be discovered in a short period of time. You report new claims to the current carrier. If you already reported a claim, and the claim is re-opened, you go back to the carrier to whom you reported the claim and present the findings, and report the claim to your current carrier for reporting purposes.
An Occurrence Policy would only allow you to report a wrongful act that occurred during the one year of coverage. You would only have the limits you purchased, and you would need to report a claim to a carrier that is not insolvent and is in business. This might be hard to find after 50 years of occurrence forms. If you had a $100,000 limit in 1976 on an occurrence form, and the claim came in today, a $100,000 limit may not even pay legal fees.
Under a claims made policy, the limits you have today would basically apply versus what your would have purchased in 1976.2 (Endorsements for increased limits can change coverage.)
What is the “gap” between the two forms?
According to IRMI, a Coverage Trigger is “the event that must occur before a particular liability policy applies to a given loss. Under an occurrence policy, the occurrence of injury or damage is the trigger; liability will be covered under that policy if the injury or damage occurred during the policy period. Under a claims-made policy, the making of a claim triggers coverage…”
If you find an occurrence form3 in the market and you decide to purchase, you just switched policy forms from a claims made form. So by switching forms from Claims-made to Occurrence, you just left your wallet on the table and you will be defending your own claim unless you are lucky to find the error and report the error in the 12 month policy period of your new occurrence form. In order to have coverage when you move to an occurrence form4, you would need to purchase an extended reporting period coverage from your claims made policy to protect you from past errors. You will be uninsured if the occurrence occurs before the new inception of the occurrence policy.
The bottom line
E&O claims arise from Insurance Agents not understanding the policy differences between these policy forms.