Unique Issues 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, professional liability and employment practices 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.

Claims-Made Policy: Pays based on the date of the lawsuit.
Occurrence Policy: Pays based on the date of the accident or occurrence.

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

Example: A employment practices liability policy is put in force January 1, 2000, and is renewed in 2001 and 2002. In 2003, however, the organization 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 2002. 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 above problem can be solved using the extended reporting period available in most policies. Caution should also be taken when replacing a claims-made insurance policy with an occurrence policy.

Work with your insurance advisor.