Claims-made insurance policies require strict compliance with notice provisions in order to qualify for coverage. These policies provide coverage only for claims first made and reported to the insurer during the designated policy period. Recent court decisions, like President and Fellows of Harvard College v. Zurich American Insurance Company (Agency Checklists, August 15, 2023, The Pitfall Of Late Notice: Harvard’s $15 Million Coverage Loss) and Nahant Preservation Trust, Inc. v. Mount Vernon Fire Ins. Co. (Agency Checklists, September 11, 2023, Claims-Made Policy Snares Another: Preservation Trust Loses Coverage For Late Notice), establish that an insured’s failure to notify their insurer of a claim made against the insured during the policy period bars coverage for that claim under a claims-made policy.
Types of policies written on a claims-made basis
Claims-made policy forms are most predominant in directors and officers (D&O) liability, employment practices liability (EPL), fiduciary liability, cyber and privacy liability, representations and warranties, pollution liability, product recall and professional liability such as medical malpractice, lawyers’ professional liability, accountants’ professional liability, and, of course, insurance agents E&O.
From an insurer’s point of view, the claims-made model is well-suited for these types of third-party liability exposures where claims may arise long after the alleged errors, omissions, or incidents that precipitated them. By requiring claim reporting of claims received during the policy period, claims-made policies allow insurers to control better and limit long-term tail exposure.
The things that can make a claims-made policy different from an occurrence policy.
1. Retroactive Dates
Claims-made policies contain a retroactive date, which establishes a cutoff for when an incident must have occurred to qualify for coverage. Any incidents that happened prior to this retroactive date will be excluded. If there are any gaps in coverage or changes in policy terms, the retroactive date often resets, which can eliminate coverage for incidents that occurred after the old retroactive date but before the new policy’s inception. This can create gaps in coverage that policyholders may not anticipate.
2. Late Reporting
One of the critical requirements of claims-made policies is that the claim must be reported to the insurer within the active policy period. Even if the incident took place during the policy term, failing to properly report it in a timely manner can still result in denial of coverage. This is in contrast to occurrence policies, which just require the incident to occur within the policy period. With claims-made policies, meeting strict notification requirements is essential. Under a claims-made policy, if the insurer can prove it received late notice of a claim that should have been reported during a prior policy period, the insured is out of luck.
3. Tail Coverage
When transitioning between claims-made policies, such as when switching insurers, retiring, or shifting to occurrence-based coverage, incidents may have occurred but will not yet have resulted in claims during the expiring policy period. Purchasing an extended reporting period endorsement (also called tail coverage) allows policyholders to report claims that arise later on incidents within the original policy period. However, tail coverage often carries a significant premium, providing a potential source of confusion and unpredictability around costs.
4. Claims in Transition
If a policyholder transitions between claims-made and occurrence coverage, disputes can emerge when claims are made years down the line over which policy should respond. For example, if an incident happened under an occurrence policy, but the claim isn’t made until years later under a claims-made policy, the question of coverage becomes complicated. These transition scenarios frequently lead to coverage litigation.
5. Prior Acts Coverage
Claims-made policies often contain provisions for prior acts coverage, which provides coverage for claims arising from incidents that occurred before the inception of the current policy but after the retroactive date. However, misunderstandings and disputes between an insurer and its insured can frequently arise over the applicable dates and scope of prior acts coverage. These misunderstandings often surprise insureds who thought they had secured more expansive prior acts coverage than the policy provides.
6. Definition of a Claim
The definition of a claim can differ significantly among claims-made policies. In some policies, even informal notices and demands can meet the definition threshold, while other policies have a narrower standard requiring the initiation of formal legal proceedings. These definitional discrepancies often lead to disputes between insurers and insureds regarding when claim reporting obligations were triggered.
7. Premium Step Ups
Unlike occurrence policies, which maintain steady premiums, claims-made premiums often start low but contain step increases year-over-year until they reach a mature rate. Insureds may frequently not anticipate these planned incremental rate hikes, creating budget issues.
8. Non-Renewal
If the insurer declines to renew a claims-made policy at the end of a policy term, the insured faces increased difficulty securing replacement coverage. New insurers may be reluctant to match the expiring retroactive date or provide the same breadth of prior acts coverage, leading to potential gaps. Shopping for replacement coverage upon non-renewal often can result in higher premiums or more restricted policy coverage.
9. Awareness Provisions
Some claims-made policies contain awareness provisions excluding coverage for any claims arising from incidents or circumstances of which the insured had previous knowledge before the inception of coverage. Questions about the extent of the insured’s awareness and whether the exclusion applies may lead, if a claim is later made, to legal conflict over this type of provision.
10. Stacking Policy Limits
With occurrence policies, each policy year has its own limits, while claims-made policies often aggregate related claims across multiple policy periods into the limits of a single policy year based on a definition of “interrelated claims.” When related claims span several policy terms, disputes frequently erupt around whether one set of limits applies or if each policy’s limits can be stacked, leading to increased total coverage. The interrelated claims definition in the policy dictates the outcome.
Bonus Item: Notice of Circumstances
Notice of Circumstance (NOC) provisions allow insureds to report situations, incidents, or allegations that have not matured into formal claims but may give rise to claims in the future. Providing timely and sufficient NOCs for potential claims can help establish coverage under the current policy, even if an actual claim does not arise until later. However, insureds must provide adequate notice identifying the relevant parties, dates, alleged injuries, and circumstances. Vague or incomplete NOCs may not qualify as proper notice.
While NOCs can help preserve coverage, they alert insurers to emerging liabilities, potentially impacting loss history and increasing renewal premiums. Insureds should strategically evaluate when to leverage NOCs, consulting with their agents or brokers to craft notices that are thorough yet tailored to essential facts.
