24 Sep Claims Made – Is It an Odd Duck?
Many may be familiar with the term “odd duck.” It essentially means “an unusual person with peculiar behavioral characteristics.” I make that reference because, in many respects, claims-made coverage is that “odd duck.” It has a different coverage form as well as a very specific coverage trigger. Terms such as “retro dates” and “extended reporting period” are standard within this form. Even key coverage differences comparing “claims-made” and “claims made and reported” are extremely important and have often resulted in claims being denied.
The origin of claims-made coverage goes back to 1964, and in those past 60 years, it has grown in its use to insure many professional liability and management liability exposures. Back in the insurance liability crisis in the mid-1980s, there was a push to make claims-made coverage the standard form in the industry. Fortunately, there was enough pushback to keep the occurrence form the predominant liability coverage form. However, it has its place, so any agency that works with this coverage form needs to know its uniqueness.
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.
Since coverage forms are not widely standardized (especially within the E&S marketplace), it is highly suggested that specimen forms be secured for analysis within the agency and that agencies provide 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 policy terms. The claim reporting requirement is an important point that the account staff should identify. Since it is also a key point that the client needs to be aware of, many agencies make specific references to this issue in the agency proposal.
- The definition of a claim can also vary from one carrier to another. The claim definition should be reviewed in-depth due to the possibility of differences among policy forms. Your client should clearly understand this policy issue.
- Retroactive Date is the earliest date a wrongful act could occur for which coverage could exist for a claim made under this policy. Wrongful acts that occur in whole or part before 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. The matter would not have become an E&O claim if the retro date had stayed the same.
- 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 applies to claims, not to any incidents/circumstances that could rise to a claim.
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- The Optional / Supplemental ERP provides coverage for claims 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 is a significant issue, resulting in many E&O claims. The key issue is when the “new” coverage form has some differences (primarily, the issue involves the reductions). The reductions should be identified and brought to the client’s attention.
While claims-made coverage is an ”odd duck,” it is definitely a significant part of our industry, and the proper training and education (of staff and clients) should be conducted.