Dissecting a claims made policy

Editor’s note: This is the first installment in a three-part series discussing the anatomy of a claims made policy. Parts II and III will be printed in future issues of Insurance Journal’s West region publication.

You’ve heard the phrase: “If I could predict the future, I would be wealthy.” If our industry truly could do that, underwriting, rating and pricing would become the easiest tasks on the planet. Short of predicting the future, however, underwriters must address “incurred but not yet known or reported” wrongful acts.

Most professional liability policies are written on a claims made or claims made and reported basis precisely to manage or control unknown or not yet reported situations. A few professional liability classes — including media, police and some medical classes — can sometimes be written on occurrence forms. But what makes a claims made policy unique and how does it differ from an occurrence policy?

Coverage triggers
The main difference between claims made and occurrence forms is what triggers coverage. The “trigger” is important because it will determine what policy and whose policy (meaning what carrier) will respond to a claim.

The trigger on an occurrence form is the date of the occurrence. As long as the occurrence takes place during the policy year, the policy will respond, regardless of when the claim against the insured is made or reported by the insured to the carrier.

Such is the case with asbestos claims, which explains why after so many years following exposure to asbestos, claims continue to be filed and policies continue to respond and enforce the “continuous exposure theory.” One person recently was deposed on a case involving that type of claim on a 20-year-old file. To exacerbate the situation, most of the policies involving asbestos claims were written not only on occurrence forms, but on “old” occurrence forms, which did not have a general aggregate limit. The new occurrence form was introduced in the early to mid-’80s.

Conversely, the coverage trigger on a claims made policy is the date the claim is first made against the insured and reported to the carrier, according to policy provisions. Both the wrongful act giving rise to the claim, as well as the claim made against the insured and reported to the carrier, must take place during the policy term, that is on or after the retroactive date, if any, and before the policy expiration. That means that claims made coverage must be continuous and uninterrupted for the insured to be protected.

Claims made forms
Most professional liability policies are written on a claims made form because of the “long-tail” exposure inherent in professional liability risks. In other words, a wrongful act may go unnoticed or unknown for a long period of time — often the case in medical malpractice or architects and engineers policies — or a plaintiff may delay filing a lawsuit for various reasons.

A claims made policy allows the insurance company to predict or make more accurate projections of total liabilities or costs for a particular class of business annually, making claims made historical data more credible and useful to the actuarial process. At the end of each policy term, the carrier can “close the chapter,” if you will, knowing there will be no surprises in the months or years to come with respect to that particular policy.

The heading of the policy will usually read: “This is a Claims Made Policy.” The insuring agreement on the policy will state whether the coverage is “claims made” or “claims made and reported.” Sometimes it reads, “claims made and reported in writing.”

Some policies indicate a number of days — usually 30 or 60 — within which a claim may be reported after policy expiration. That is normally referred to as an “automatic reporting period,” and it is typically free of charge. It is important to negotiate this item with the underwriter if the policy does not automatically include it. Failing to negotiate the automatic reporting period could leave the insured with no time to report a claim that, for example, may be in the mail the day the policy expires and is received after the expiration of the policy. Or, the insured may be out of town and unable to report the claim if it is received on the day of expiration.

Naturally, the most beneficial form for an insured is the one without any reporting restrictions. Those are difficult to find.

Retroactive dates
A unique feature found on a claims made policy is the retroactive date or prior acts clause, which is key to a claims made policy and must, above all, be preserved. Losing it means the insured will have no coverage, and thus will have nothing to show for the premium paid.

The “retrodate,” as it is usually referred to, is imposed by the carrier to limit its liability to apply to claims arising out of wrongful acts committed after such date, only and before the expiration date of the policy.

There are basically three retroactive date options available. “RDI,” which means the retrodate and the policy inception date, will be one and the same. This is normally used on new ventures, or on risks with heavy claim activity or hazardous practices that have been non-renewed by their existing carrier. In this case, the insured is looking for coverage elsewhere. Those “distressed” risks may have an option to purchase an extended reporting period endorsement from the expiring carrier, and thus can deal with the RDI offered. That being the case, the carrier looks at limiting its liability on a “fresh start” basis and often will attach a prior and pending litigation exclusion endorsement to further protect its interests.

Another option is to “preserve the existing retrodate” when a risk is either shopping for pricing and coverage or being non-renewed as a result of a change in underwriting policy by the incumbent or a change in the operations of the insured. Preservation of the “retrodate” is critical.

Finally, the last option available is no retrodate or “none,” which means no limitation. In other words, “full prior acts” coverage applies. This is available to risks that already have full prior acts coverage and are looking at moving for pricing reasons or coverage enhancements, and have had continuous, uninterrupted claims made coverage. Perhaps the incumbent carrier is non-renewing due to non-underwriting and/or claims reasons, such as exiting a particular state or discontinuing the specific class.

If the risk is acceptable and either a specific retrodate or full prior acts coverage is granted, the underwriter must have a copy of the expiring professional liability policy declarations page evidencing such a date. In some cases where the date is not shown on the declarations page, a copy of the pertinent retrodate or prior acts endorsement must be obtained.

The continuation of “Dissecting a claims made policy,” which will discuss extended reporting period endorsements and prior and pending litigation exclusion endorsements, will be published in subsequent issues of Insurance Journal.

Rocio L. Orta is a professional liability specialist with Western Security Surplus Insurance Brokers in Pasadena, Calif. E-mail: rorta@wssib.com.