At first glance liability insurance seems simple enough. You take out a policy and in the event that a claim is made against you then you call the insurer and have them resolve the issue. However, first glances can be misleading.
Consider this scenario; your business is plumbing. You’re asked to deliver a contract for the plumbing for some new build houses. Five years later one of the houses floods and it’s alleged that you were negligent in performing your duties. Over the previous five years you have changed insurers three times to get better value for your premium. Which of the three insurers now has to deal with the claim? Your current insurer? The insurer at the time of the work? The insurer who you were with when the damage was occurring?
Claims-Made vs Occurrence Insurance
The answer to those questions is complex and it really depends on the kind of liability insurance you have (and had).
If your policy is on an occurrence basis then the claim is handled on the basis of which policy was in force on the date of the event causing the loss. This is true even if that policy has expired. So in the case of our plumber – if their insurance is on an occurrence basis it’s the insurer they were using when they did the work that they need to sort out their claim.
A claims-made policy on the other hand is triggered by the date that you are first made aware and notify your insurer of the claim (or indeed potential claim).
Claims-Made vs Occurrence Insurance for Insurance Brokers
For insurance companies the occurrence insurance is the simpler of the two kinds of insurance to generate. However, it has the disadvantage that the profit and loss on the policy can’t be reported quickly (potentially for decades) as the insurer has to be confident that no claims will be made against the policy before reporting on it.
Claims-made insurance on the other hand allows for a much simpler balancing of the books. When the policy expires the insurer can report the income (or loss) from that policy.
There are challenges associated with writing claims-made policies. In that they are more complex than occurrence policies. There is also the potential of a client being left without coverage because they fail to notify the insurer properly during the period of cover. In our plumber’s case his insurance might be nearing expiry when he hears that there’s been some damage on the new build home. Because he’s not certain that it has anything to do with him, he doesn’t tell the current insurer. Then when he is certain and tells the new insurer they reject the claim because he should have told the old insurer there was a potential claim. The old insurer no longer insures the plumber and won’t take the claim either.
Making a claim under a claims-made policy
There are in essence three triggers for a claim under these policies:
- The insurer must receive notice of a claim (or potential claim) during the coverage period
- The act of negligence, omission or error that gives rise to the claim must have occurred after the retroactive data that was specified in the policy
- The insured party has to make a “good faith” statement that they had no knowledge of the mistake before or on the date that coverage was purchased
The retroactive date is a key component of claims-made insurance. It’s something that needs to be keenly negotiated between the insurer and the insured party when they purchase the policy. Any acts, occurring before that date, are not insured. The ideal retroactive date for the insured party is the date that the first began providing services or the earliest date (under law) that they might be held liable for an incident. Brokers and insurance providers on the other hand need to be certain that the risk is reasonable and may not wish to extend coverage to these dates if the party has no prior insurance or has major gaps in their insurance coverage to date.
Reporting requirements also need to be strictly defined in the policy and the insured party needs to be made aware of these and their obligation to comply. An “awareness provision” is common (given the length of time it takes for claims to develop and be resolved) which requires the insured party to notify the insurer whenever there is a possibility of a problem.
Claims-made policies have a simple objective but can be extremely complex to develop. It’s vital that both insurance brokers and insured parties have a strong understanding of exactly what is involved and what is required from each party. Risk-management for a business requires that their liability insurance provide adequate protection in all scenarios. It’s simply a matter of putting the pieces together properly.