Understanding how a claims-made policy works, and how it differs from an occurrence-based policy, is extremely important to ensure you are selling the policy to best protect your clients.
An occurrence-based policy covers losses or accidents that happen during the policy period, regardless of when the claim is filed. A claims-made policy covers claims that are made (or made and first reported) during the policy period. In short, the claim must be made against the insured DURING the policy period. With a claims-made policy, the insured needs to have active insurance when the claim is made against them. If they canceled their policy – or forgot to pay their premium and the insurer canceled it – they will be uninsured.
An example of a well-known case that illustrates how a claims-made policy works is Darwin National Assurance Co. v. Kentucky State University. KSU purchased a professional liability (EPLI) policy from Allied World with a policy period from July 1, 2014, to July 1, 2015. The policy stated that a claim was deemed to have been made on the date that KSU received notice of the claim. Additionally, any related claims were deemed to be a single claim—applying the date of notice from the earliest related claim to all other related claims if applicable. The policy also provided that written notice be given as soon as a possible claim was discovered but no less than 90 days after the policy’s end date, making this a “claims-made-and-reported” policy.
On June 23, 2015, KSU received notice of administrative charges filed against them with the United States Equal Opportunity Commission and the Kentucky Commission on Human Rights from two former employees. The insurance policy they had purchased expired on July 1, 2015, and the 90-day reporting period expired on September 29, 2015.
On October 2, 2015, 93 days after the policy’s coverage period ended – even with the extended reporting period – the insured, KSU, provided written notice to Allied World requesting coverage for the claims. Allied World denied coverage. In the Kentucky Court of Appeals, the denial of coverage was upheld. KSU argued that the three-day “miss” was only technical error and that Allied World was not hurt by it. Allied World countered that it did not have to show that its interests were injured by the delay. In the language of insurance, Allied World did not have to show “prejudice.” Simply put, on claims-made policies, close enough is not good enough.
Why? The answer lies in the nature of the policy and the policy language. Our industry has claims-made policies because they provide stability and certainty – the measuring stick is when the claim is made or made and first reported. We can confidently close files, so to speak, on a claims-made policy if the year goes by without a claim. We can’t do that on occurrence-based policies nearly so easily. So, the claims-made concept depends upon timely notice. A “close enough is good enough” sort of approach erodes the very reason for the policy.
That’s important for our insureds to understand – if they have a claims-made policy, they should generally report it as soon as possible.