17 Aug Claims-Made to Occurrence – Potential for Gaps?
It has been well documented that the claims-made coverage form has caused its share of E&O claims. One issue to pay particular attention to involves moving coverage from a claims-made form to an occurrence form. While this probably does not happen often, there is serious potential for a coverage gap when it does. Agencies need to understand the issues and bring these types of issues to the client’s attention. By doing so, agents can significantly minimize the possibility of facing an E&O claim if an uninsured loss occurs.
With a claims-made form, the policy in effect when the claim is brought is responsible for responding to the claim. Claims-made policies either contain a retro date or provide full prior acts coverage. If the policy contains a retro date, the injury/error or omission must occur after the retro date for coverage to apply. Thus, with a claims-made policy, the trigger is when the claim is made, not when the injury/error or omission occurred.
With an occurrence form, the policy in effect when the injury or damage occurs will respond to the claim. Provided the injury or damage occurred during the policy period, an occurrence form will respond regardless of when the claim is brought, subject to any applicable statute of limitations.
There is tremendous potential for a gap in liability coverage to occur when the insured’s policy coverage goes from a claims-made to an occurrence form. Let’s assume policy dates of 2020 for the claims-made policy and 2021 for the occurrence form. A common scenario is where the injury occurs during the claims-made policy period (2020), but the claim for the damages is made during the occurrence policy period (2021).
In this case, neither policy provides coverage. Why? As previously stated, the occurrence form only pays if the injury occurs during the occurrence form’s policy period. The injury/error or omission occurred in 2020 before the occurrence form went into effect. Because a claims-made form only responds to claims made during the policy period, neither policy’s condition is met. The injury/error or omission occurred before the occurrence form existed – and the claim came after the claims-made form expired. If this happened to one of your customers, you could very well face an E&O claim.
So, you ask – what should an agent do to avoid a coverage gap? When an account is moved from a claims-made form to an occurrence form, the insured has the availability under the claims-made policy to purchase an Extended Reporting Period (aka “tail”). Customers/agents must realize that this tail option must be exercised within a set time period (typically 60 days). Essentially, the tail provides an additional time period to report a claim for any injury/error or omission that occurred during the claims-made policy period and after any applicable retro date. Obviously, the client should be aware of a “cost” for the tail coverage.
Let me throw an additional twist at you. Your agency just took over the account from Agent A, who had insured the customer under a claims-made form, and you look to move the client to an occurrence form. Who is liable if a loss occurs and neither policy responds? This is not an easy question to answer without more facts.
Assuming that your agency knew that the prior coverage was written on a claims-made basis, it would be prudent for your agency to advise the customer that they should exercise the tail options in their claims-made policy to avoid a coverage gap. Every effort should be made to secure this vital information. Your agency probably has a greater degree of liability since you will probably have more responsibilities to the customer as the new agent.
Moving an account from “claims-made” to “occurrence” is a serious matter. As with many E&O issues, attention to detail is key.