Claims-made liability insurance policies became popular several decades ago in response to spiraling premiums for professional liability coverage. Because claims-made policies, unlike conventional “occurrence”-based liability policies, cover only claims made against the insured during the policy period, insurance companies were able to sell these policies at a lower premium. But policyholders paid a price for these lower premiums in the form of substantially narrower coverage and policy conditions that potentially leave policyholders without coverage they think they have. This article identifies several potential land-mines under claims-made liability policies and suggests strategies for dealing with them.
The Claims-Made Policy: Claims-made policies are most commonly used to insure certain specific risks: professional liability (also known as “errors and omissions” or “E&O” coverage) for doctors, lawyers, accountants, and other professionals; environmental impairment liability; employment practices liability and directors and officers liability. They are rarely used to write good old-fashioned general liability coverage (i.e., commercial general liability insurance, typically provided by some version of the industry-standard ISO form, and otherwise known as “CGL” coverage, which insures against bodily injury, property damage and certain personal tort claims).
The Claims-Made Coverage Trigger: In the parlance of insurance coverage, “trigger” refers to the event which must occur during the policy period in order for there to be coverage. For example, if your home burns down, your homeowners insurer isn’t going to pay your cost of building a new one unless the fire happened during the policy period. In the typical CGL policy, the event which triggers coverage is the occurrence of an injury to some third party. For example, if your client, a homebuilder, builds and sells a home in year one, it suddenly and without warning collapses ten years later, and the homeowner sues your client three years after his home collapses, insurance coverage for this lawsuit under an occurrence-based CGL policy will be triggered only under the policy in place when the home collapsed, because that is when the injury occurred. Under a claims-made policy, on the other hand, coverage would be triggered only under the policy in place when the claim is made. It is the making of a claim by a third-party, not the occurrence of injury or damage to the claimant, that triggers coverage. Except under “triple-trigger” claims-made policies (see below), it doesn’t matter when the conduct resulting in the harm occurred; it matters only that the claim against the insured is made during the policy. (Regarding the technical distinctions between claims-made and occurrence policies and an in-depth treatment of claims-made policies generally, see Kroll, “Claims-Made” – Industries’ Alternative “Pay As You Go” Products Liability Insurance, 637 Ins. L. J. 63 (Feb. 1976.))
Double and Triple-Trigger Claims-Made Policies: Most so-called claims-made policies are really “claims-made-and-reported” policies. In other words, coverage is triggered only if (1) the third-party claim is asserted against the insured during the policy period and (2) the insured reports the claim to the insurer during the policy period. Still other policies contain a third trigger requirement: The act or omission out of which the claim arises must occur during the policy or, if purchased for an additional premium, during a retroactive period. These double and –2– triple-trigger requirements create landmines with respect to reporting claims and placing insurance coverage (see below).
What Constitutes A Claim: Controversy may arise between the policyholder and its insurer regarding whether a claim has been made that triggers coverage. For example, is a complaint lodged by an aggrieved employee with the Equal Employment Opportunity Commission a “claim” obligating the insurer to respond, if the employee hasn’t also filed a civil action for damages? Every claims-made policy will define what constitutes a “claim.” But these definitions differ. Many include, in addition to civil suits, administrative proceedings and any “written demand for money” or other relief. Prudence dictates that the policyholder give prompt notice of any event which may arguably fall within the policy’s definition of claim.
Notice as a Condition Precedent To Coverage: This is crucial: Under most claims-made policies, notice by the insured to the insurer before the policy (or if purchased, the extended reporting period) expires is a condition precedent to coverage. If this condition is breached, the insurer may – and probably will – deny coverage. Insurers typically show no mercy with respect to enforcing this condition. And the “notice-prejudice” rule -- which provides that late notice under a conventional CGL policy does not excuse the insurer’s performance of its duties unless the insurer can prove it was prejudiced by the delay in receiving notice – has been held in many states not to apply to claims-made policies. See, e.g., Chamberlain, Claims-Made Policies Are Enforceable In California: Trends After Burns v. Int’l. Ins. Co., 28 Tort & Ins. L. J. 90 (Fall 1992). This means that policyholders must be particularly vigilant about reporting claims and, depending on the requirements of their policy, perhaps potential claims, before the policy expires. And don’t assume that if you renew your claims-made policy with the same insurer, you can report, after renewal, a claim made against you during the prior policy. Unless your renewal policy accommodates this scenario by way of an appropriate retroactive period or “prior acts” provision -- which you must specifically negotiate and pay premium for -- your carrier will likely refuse to pay this claim.
Assembling Uninterrupted Coverage: The claims-made trigger creates potential coverage gaps when switching from occurrence to claims-made coverage or vice versa. For example, if you replace a claims-made policy with an “occurrence” policy, you may be uninsured under your claims-made policy for a claim that is made after it expires for harm which occurred before the “occurrence” policy incepted. But you will also be uninsured under the replacement “occurrence” policy because the harm occurred before the policy incepted. These kinds of coverage gaps can be avoided by purchasing “retroactive period” or “prior acts” coverage (which extend coverage for claims made during the policy but arising out of conduct occurring before the policy) and “extended reporting period” coverage (which extends the time beyond expiration of the policy for receiving and reporting claims). You will probably pay additional premium to add these provisions to your policy, but the seamless coverage you buy will be worth it.
Duty to Disclose Potential Claims: To avoid providing coverage for claims that the insured knows about before it buys the policy, insurers require that applicants for claims-made policies provide specific information concerning facts or circumstances which may give rise to a claim. The applicant’s failure to be fully forthright in providing such information may prejudice his rights under the policy. Insurers will not hesitate to deny coverage for a claim if they discover –3– that the insured was aware, when it applied for the policy, of facts which arguably placed the insured on notice that a claim may be made during the policy. And the insurer may be entitled to rescind the policy if the insured misrepresented or concealed material facts when applying for it. This duty to disclose material facts in the application for insurance leads easily to disputes between the policyholder and his insurer. How much information to disclose in the application may be a hard judgment to make. For example, is an applicant required to disclose every complaint ever lodged by a disgruntled employee, at the risk of losing coverage if one of those employees brings a discrimination suit during the policy period? And if the applicant discloses too much, will the prospective insurer refuse to insure him? These issues have never been litigated in Nevada. But Nevada follows the majority view that material misrepresentations in an insurance application are grounds for denying claims or rescinding the policy. See Nev.Rev.Stat. §687B.110; Randono v. CUNA Mutual Ins. Co., 106 Nev. 371, 793 P.2d 1324 (1990).
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Claims-made insurance is here to stay. If you or your clients have professional, environmental or corporate-governance exposures that must be insured, you will likely insure them under a claims-made liability policy. When procuring the policy, take special care to preserve seamless coverage. Spend the additional premium for retroactive periods and extended reporting periods. Judiciously disclose any facts or circumstances that may be material to the risk. Be certain that you and your clients understand the “trigger” requirements of the policy and have protocols in place to ensure that potentially covered events are promptly reported to the insurer. And if your insurer doesn’t promptly affirm coverage for the claim, don’t take no for an answer