03 Nov Claims-Made Coverage – Some Unique Issues
Claims-made coverage developed in 1964 and in those 55-plus years, it has certainly grown in its use to insure many professional liability and management liability exposures. When not properly understood and managed, it also continues to be involved in a fair number of E&O claims. The claims-made coverage form has many unique differences (compared to an occurrence form) and thus there is a need for specific training of the staff handling this form as well as education of the clients.
Contrary to an occurrence form, with a claims-made form the policy in effect when the claim is brought is responsible for responding to the claim. Thus, with a claims-made policy, the trigger is when the claim is made, not when the injury/error or omission occurred.
Certainly, a key issue is that there is very little standardization of the coverage forms. Thus, it is heavily suggested that specimen forms be secured for analysis within the agency. Agencies should consider providing these forms to the client for their review.
For coverage to apply (subject to exclusions), the claim must be reported in writing to the insurer as required by the terms of the policy. The reporting requirement is an important point to be identified by the staff working on the account. It is also a key point in which the client needs to be aware.
The definition of a claim. This can also vary from one carrier to another. With the possibility of differences among policy forms, the claim definition should be reviewed in depth. Your client should clearly understand this policy issue.
Retroactive Date. This is the earliest date on which a wrongful act took place for which coverage could exist for a claim made under this policy. Wrongful acts which occur in whole or part prior to this date are not covered, even if a claim is made under this policy during the policy period or extended reporting period. Every effort should be made to maintain an original retro date and retro dates should not be advanced. A few years ago, in the E&O Plus program, the advancement of a retro date resulted in a $10.7 million E&O claim.
Extended Reporting Periods (also known as tail coverage). Claims-made forms will contain two types: Automatic / Basic ERP and Optional / Supplemental ERP. There is a difference in the coverage applicable to each and it is important to understand the differences.
- The Automatic / Basic ERP is typically a 60-day provision. A key issue is that this policy provision is applicable to claims, not to any incidents / circumstances that could rise to a claim.
- The Optional / Supplemental ERP. This provides coverage for claims to be made after the policy has expired. These claims must concern events that occurred while the policy was still active. The Optional ERP must be purchased within a stated time period and once it is purchased, it is fully earned and cannot be adjusted.
Moving the account to a new carrier. This is generating SIGNIFICANT E&O activity when the client is not made aware of the differences (definitely the reductions) when the account is moved to a new carrier. With the variance among claims-made forms, a comparison of the different forms should be conducted.
Without question, claims-made coverage is a significant part of our industry and the proper training and education (of staff and clients) should be conducted. For further information on this subject, E&O Plus insureds can check out the February 2020 webinar on Passport.