Brief background
Most property & casualty insurance policies are occurrence policies. Your personal auto, homeowners and business owners policies are good examples of an occurrence policy. With an occurrence policy, the policy that is on the risk at the time that a covered act ‘occurs’ is the policy that the claim will be settled under, regardless of when the act is reported (barring policy provisions and/or statute of limitations issues). For most property losses i.e., such as an auto accident, it is very easy to determine the occurrence date. Same goes for the casualty (liability) side of that auto accident; there is a very precise date and time as to when the act occurred. The time frame to report, adjust and settle most of these claim types is fairly short.
Professional Liability Insurance, as well as some other insurance casualty lines do not always have a short claims cycle.
1. The time between when the act occurs, the claim is made, and act reported can be months or years apart.
2. The ‘act’ might span many years, where determining with an occurrence type policy which policy/insurer is responsible for providing coverage for the covered act can be very difficult to determine. A pollution claim is a great example of this type of loss.
3. Because of the time frame between when the act occurred and the knowledge of the actual claim to report can be long it can be difficult for an insurer to know what their true loss costs are for any given policy year if an occurrence policy were used. If an insurer cannot predict its true claims costs for a given line of business, it is unlikely the insurer or industry would provide insurance at a cost that the insurance consumer would want to purchase.
During the liability insurance crisis in the 80’s, this was part of the problem. The availability for casualty insurance for certain lines of business dried up and/or became extremely costly.
Claims-Made Insurance
Claims-made professional liability insurance for lawyers, accountants, doctors, title agents and other malpractice lines came into being to address these issues. With a claims-made policy in its purest form, the covered act occurrence and reported claim need to happen in the same policy period. While this might work for some lines of business for others such as professional liability insurance or malpractice insurance this is not a workable solution.
The use of a “prior acts date” or “retroactive date” solves this issue.
Prior Acts
With a prior acts date, the policy that is inforce when the covered act is reported or the “claim made” is the policy form and insurer that will provide the coverage, providing that the covered act occurred after the prior acts date on the current policy. The claims-made policy form then addresses all of the issues raised above.
Down side of Claims-Made Coverage
The danger with claims-made coverage is if the insured allows coverage to lapse. Then there is no insurance policy to report future claims to for past acts, even though there was coverage inforce at the time the act occurred. This brings up 2 responsibilities for the insured with claims-made coverage:
1. The insured needs to maintain continuous claims made coverage. A coverage “gap” with claims-made insurance usually results in the resetting of the prior acts date to the inception date of the new claims-made insurance, thus wiping out coverage for all past acts.
2. The insured needs to make sure that at renewal, especially if changing insurers, that the prior acts date is maintained on future renewals and is not shortened.
L Squared Insurance Agency specializes in claims made coverage for Lawyers, Accountants, Title Agencies, and Dentist.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080 |