Claims-Made Coverage

Claims-made coverage refers to the policy providing continuous coverage for acts occurring prior to the policy's inception and reported during the policy period, as long as the insured has maintained regular coverage. It facilitates the payout of claims furnished within the policy tenure, irrespective of the time of occurrence of an incident.

The claims-made coverage trigger must occur before a specific liability is applied to the insured. Many businesses use it to safeguard their assets, especially to mitigate errors and omissions (E&O). In other words, companies mostly use it to cover any possible error related to errors and omissions (E&O) in financial reporting.

• A claims-made insurance policy provides continuous coverage for previous losses until the insured keeps their insurance alive.
• It aids in the easier settlement of claims submitted during the twelve months, regardless of when the duty violation or event occurs.
• It does have initial lower premiums but does not offer coverage beyond its closure period.
• It provides coverage to claims during active policy tenure without considering their time of occurrence. In contrast, the occurrence policy covers all loss claims, whether they happened during active coverage or not.

Claims-made coverage is a policy that reimburses insurance claims for damage or loss incidents that occurred in the past, even if the insured had coverage with a different insurer. It becomes the preferred option when there is a delay between the claims filed and the occurrence of events. Some insurers even offer limited-type claims policies covering claims done with respect to the insured while being reported under the policy duration. It basically covers instances the one reports during an extended reporting or active policy period including the second criteria of occurrence after retroactive start-date of the policy. 

Insurers provide coverage for past incidents if the criteria are met. After making claims during force-trigger coverage, the insurer will save the policyholder and pay the claims. However, all claims must be made only during the active policy period by the insured; otherwise, the claim gets rejected. Plus, the insurer won't hear any claims if the policyholder allows the policy to lapse or cancel. 

Furthermore, claims involving incidents during the active policy period will be rejected if the policy expires and is not renewed unless tail coverage is purchased. Claims-made coverage can also help cover claims such as sexual harassment, discrimination, and wrongful termination. Claimants have the flexibility to file claims months after the incident, making it suitable for employment practices liability, which can be invoked to cover wrongful actions by company officers and directors. 

Let us take the help of a few examples to understand the topic.

Example #1

Let us assume that a small business, A, buys general liability insurance based on claims made. The policy becomes effective from February 1, 2023, and will remain active until January 31, 2024, with November 1, 2022, as a retroactive date. A loss incident happened on December 12, 2022, for which A made a claim on its insurer.

As the loss incident was reported within the policy tenure and took place after the retroactive date began, the claim is valid to be covered and reimbursed by the insurer. However, the policy would not have covered that loss if any incident or accident had happened before November 1, 2022.

Example #2

Suppose a company's executive team, covered by claims-made coverage, makes decisions impacting the environment. A year later, shareholders expressed concerns about potential environmental damages and filed a lawsuit. The executives are protected with claims-made coverage, provided the claim is reported during the active policy period. This example portrays how this specific policy can safeguard against liabilities arising from ESG-related (environmental, social, and governance) issues.

Companies must consider the benefits and losses of the policy before taking it up, as mentioned in the table below:

Advantages

• It initially has lower premiums.
• It comes with an option for tail coverage.
• Provides tailored coverage to businesses.
• All claims remain covered even with updated terms.
• Useful for covering staff litigation or executive fraud.
• Covers claims directed before the policy activation and retroactive date.
• Modified claims-made coverage provides prepaid tail coverage with automatic activation.

Disadvantages

• Contains the risk of reaching the policy limit.
• Reporting time is limited.
• Complications may arise when switching plans.
• Premiums generally increase every year.
• Insurers may not provide retroactive coverage for specific tenures, leaving businesses vulnerable to unreported or old claims.
• If the insurer cancels or fails to renew the policy, no coverage remains for claims after these events.

All business-related insurance falls under either of the two categories, but they have certain differences, as per the table below;

This article has been a guide to what is Claims-Made Coverage. We compare it with the occurrence policy, and explain its examples, advantages, and disadvantages. You may also find some useful articles here –

• Malpractice Insurance
• Professional Liability Insurance
• Nose Coverage