Unique Issues of Claims-Made Policies

Before we get into the directors’ and officers’ policy (D&O) or the employment practices liability policy, let’s review the components of claims-made insurance.

Most casualty insurance policies (general liability, automobile, workers’ compensation) pay for events that occur during the policy period. For example, an auto insurance policy will pay for an accident that occurs while the policy is in force. D&O policies, however, pay for lawsuits filed during the policy period; the wrongful act could have occurred years before. Claims-made policies respond only when a suit is filed or when a strong threat of a suit exists.

Difference between Claims-Made and Occurrence Policies

Claims-made policy: pays based on the date of the lawsuit.

Occurrence policy: pays based on the date of the accident or occurrence.

Retroactive Date

Claims-made policies respond to claims brought during the policy period. Some policies include a requirement that the occurrence (the date of the wrongful act) takes place after the “retroactive date.” When changing insurance companies, it is vital to understand if the new policy has a retro date. The use of a “tail” may be necessary if the retro date is not sufficiently in the past.

Pending and Prior Litigation Exclusions

Most policies now do not include the above-described retroactive date. Instead, insurers cut off coverage for any claim that was known prior to the inception of the policy. So-called “pending and prior” dates serve to protect the insurer from the insured claiming coverage when that person already knew the “barn was on fire,” so to speak. Such pending and prior exclusions allow the insured to have full comfort in coverage for prior acts.


The downside of a claims-made policy comes if the policy is cancelled.

Example: A D&O policy is put in force January 1, 2010, and is renewed in 2011 and 2012. In 2013, however, the bank decides to end the coverage, as the premium has increased. Six months later, a letter from an attorney arrives announcing a lawsuit for discrimination in hiring that occurred in 2011. No coverage. Although the policy was in force at the time of the alleged discrimination, the policy was not in force when the suit was filed.

The solution to the above problem is to keep policies in force. Short of that, you will need the extended reporting period found in most policies (see the next paragraph).

Why would any bank cancel its D&O insurance? Mergers and acquisitions are the most common reason. Perhaps claim problems prevent a new insurer from providing coverage for past acts?

Discovery Period/Tail/Reporting Period

Claims-made policies provide protection for lawsuits and actions brought during the policy period. In the event that coverage is replaced or cancelled, protection may be desired for events that took place prior to expiration/cancellation but for which no claim has yet been filed. This is called a “tail” or “extended reporting period.”

Issues to Consider in Your Current Policies:

Can the insured buy the extended reporting period (ERP) at his or her option, or only when the insurance company cancels the policy?

For what time period is the extension of reporting valid? You may want at least three years of coverage.

What is the premium for the ERP?

In what time frame must the insured decide to buy the ERP?