From time to time, an account is moved from one form of insurance to another. The scenario could involve moving from a claims-made form to an occurrence form, or vice versa. Other scenarios could involve moving from a claims-made form with full prior acts to one with a retro date, or from a claims-made form to a claims-made and reported form. It’s imperative to know the differences and the issues this type of policy movement can cause. Bringing these issues to your customer’s attention is key, and could play a huge role in avoiding errors and omissions (E&O) trouble for your agency if an uninsured loss occurs.
Of the scenarios mentioned, perhaps the biggest potential issue involves moving from a claims-made to an occurrence form. Let’s take a look.
Moving From Claims-Made to Occurrence
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. For coverage to apply if the policy contains a retro date, the injury (error or omission, etc.), must occur after the retro date. 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 2011 for the claims-made policy and 2012 for the occurrence form. A common scenario is where the injury occurs during the claims-made policy period (2011), but the claim for the damages is made during the occurrence policy period (2012).
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 2011, 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.
Does Your Client Need a Tail?
What is the remedy or suggested course of action to avoid a gap in coverage? 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, commonly referred to as a “tail.” It is critical that customers/agents realize this tail option must be exercised within a set time period (typically 60 days, but other time periods might exist). 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.
One situation recently brought to my attention involved this scenario, but with the added issue that it involved two different agents. Under my example above, Agent A insured the customer under a claims-made form during 2011, but lost the account to Agent B, who insured the same customer now under an occurrence form for 2012. Who is liable if a loss occurs and neither policy responds? This is not an easy question to answer without more facts.
If Agent A lost the account to Agent B, does Agent A have any further duties? Insureds frequently move their coverage from one claims-made form to another claims-made form. While there is the potential for coverage differences, as long as the retro date is the same on both policies (or both provide full prior acts), there is minimal chance for a coverage gap. Typically, moving an account from one claims-made form to another does not necessitate the need for this tail option to be exercised.
Thus, when Agent A loses the account, there is a good chance (unless the insured advised otherwise) Agent A would not be aware of what policy form Agent B used.
Does Agent B know that the prior coverage was written on a claims-made basis? If he was aware of this, it would be prudent for Agent B to advise the customer that to avoid a coverage gap, he should exercise the tail options in the claims-made policy.
Should Agent B be aware of the previous policy form? Probably, but it might not be possible if the customer does not allow a review of previous policies. Effort should be made to ascertain this vital information.
A Serious Issue
It would appear that Agent B has a greater degree of liability in this case; Agent B is the new agent and owes more responsibilities to the customer.
If your insurance agency is the only agent involved (there is no Agent B), it is clearly your responsibility to advise your customer of the coverage differences. If customers choose the occurrence form, bring to their attention the need for them to secure tail coverage.
Moving an account from a claims-made to an occurrence form is a serious matter. Understanding the issues that can result and educating your customers about them is essential to avoiding an E&O issue down the road.