Claims Made Liability Insurance
Claims-made policy forms prevail among insurers underwriting Professional, Directors and Officers, Employment Practices and Pollution liability insurance. For certain industries (i.e. pharmaceuticals) claims-made forms are widely used to write Products liability.
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Occurrence policies cover claims from “occurrences” during the policy period, regardless of when the claim first becomes known or is reported to the carrier. While claims filed years after an occurrence may be covered, policyholders and insurers are left with uncertainty as to adequate liability limits and/or proper loss reserves.
Typical claims-made policies cover only those “claims made” and reported to the carrier during the policy period (or during an extended reporting period). Liability insurance written on an occurrence policy form and later renewed as a claims-made policy presents potentially serious gaps in coverage. Claim disputes between insureds and carriers arise from a number of sources, including Coverage Triggers, Retroactive Dates, and Tail Coverage.
Claims-made liability insurance is designed to cover “wrongful acts” (actual or alleged) stemming from an error, omission or negligence of the named insured. The definition of “wrongful act” varies by type of professional liability policy purchased. For example, one common definition of “wrongful act” in Employment Practices Liability policies includes “sexual harassment, discrimination or wrongful termination.” Conversely, the definition of “wrongful act” in a D&O policy can be “any actual or alleged breach of duty, misstatements or misleading statements committed by the insured.” The definition of “Wrongful Act” is critical in serving as the “claim trigger” under a given claims-made policy.
Coverage for (unknown) acts which occurred during a “prior” policy period (“prior acts coverage”) begins on the “retro date” and continues to the current policy period. “Prior acts coverage” is usually available only if the expiring coverage was also a claims-made policy. “Full prior acts coverage” responds to claims from acts occurring at any time prior to the current policy period.
While the policy’s “retro date” establishes the earliest date of coverage, the “extended reporting period” determines the final date of coverage (typically 30-60 days after policy expiration). “Tail coverage” is provides coverage for exposure to unknown liability claims when the insured person (or entity) retires, is acquired, ceases operations or decides not to renew insurance.