Over the last two weeks the “claims made” policy has been dissected, revealing its inner workings. But before moving on to the keys for choosing the best “claims made” policy form, the heart of the “claims made” policy must be explored: the definition of a “claim.”
The Definition of “Claim” Scrambles Everything
Defining a “claim” in the context of a “claims made” policy is the first issue when analyzing coverage. Many Appellate courts have ruled that a “claim” is “a demand for money or services.” Sounds simple enough; yet isn’t the filing of a lawsuit, even if un-served, a “demand for money?”
What if suit is filed in one policy term where the definition of claim is “a written demand” yet served after renewal on a policy written by another insurer whose policy defines “claim” as “a written demand received by the insured,” or” a lawsuit served on the insured?” Under these definitions, two insurers could have coverage for the same “claim,” which is not supposed to happen with “claims made” forms.
More complicated is the scenario where an insured moves coverage from an insurer whose definition of “claim” is “a written demand received by the insured,” to an insurer that applies a Prior and Pending Litigation exclusion using the policy’s inception date. If suit is filed during the expiring policy term but served after the inception of the new policy, the claim will be denied by both – even if reported to the prior insurer within the 30 or 60 day reporting extension (if applicable). The suit does not meet the extended reporting period requirement as it was not “received by the insured” during the policy term. The new insurer will likely deny liability because the litigation commenced (the suit was filed) prior to inception. Thus a gap in coverage is created, which isn’t supposed to happen when the insured has continuous “claims made” coverage.
When analyzing an insured’s coverage, knowing that differences in the definition of a “claim” may exist can lessen the agent’s own errors and omissions exposure.
Playing the “Claim Game”
Agents and brokers who do not work with “claims made” coverages on a regular basis now should have a much deeper understanding of the intricacies and differences each carrier/policy form offers. Successfully navigating through “claims made” policies requires specific attention to detail, particularly to the policy form definitions.
As has been presented in this series, one “claims made” policy is not just as good as another; and if the insured has been covered by an inferior form in the past, changing to a superior form could create coverage gaps. Knowing how the find the potential gaps makes good agents better agents.
Formulate claims scenarios when/if coverage is being moved to another carrier and policy form. Several may need to be created and run – comparing the scenario to the coverage form wording – to assure that there are no gaps or what gaps there might be.
What to Look for in a “Claims Made” Policy
Placing a “claims made” policy requires the agent to look for certain policy characteristics. Following are a few hallmarks of the “best” “claims made” coverage forms:
- Try to use a company that uses a “claims made” form rather than a “claims made and reported” form. Unfortunately this will prove the most difficult;
- If the only form available is a “claims made and reporting” form, look for one that automatically provides the insured 30 or 60 unrestricted additional days after expiration to report a claim first made prior to expiration. Make sure the definition of “claim” does not require “receipt by the insured;” and/or
- Use a form that does not use the inception date as the prior and pending litigation or continuity date when there is prior coverage in force. Or use one that excludes “known litigation…prior to inception” only.
Use of these simple rules will ensure better coverage for clients and fewer chances for errors and omissions claims for the agent. In addition, by asking for endorsements to clean up the language, fewer underwriters will be heard to say, “You’re the only one asking.”
This ends the five-part series on “claims made” coverage forms. Hopefully this has increased awareness of the pitfalls and gaps potentially present in the use of these forms.
About the Author
Frederick J. Fisher, J.D. is the CEO of E.L.M. Insurance Brokers and is the Executive Vice-President of Insurance Specialty Group’s Professional Liability Practice. For the past 35 years, Fisher has been actively involved in underwriting and placing Professional Liability accounts or in the adjustment, investigation, and resolution of Professional Liability Claims. He has spent his entire career working with “claims-made” insurance policies and their evolution.
Fisher, a founding member of the Professional Liability Underwriting Society (PLUS), has been the senior technical advisor for The Professional Liability Manual published by the International Risk Management Institute since 1989. He testifies regularly as an expert witness in cases dealing with the duties and obligations of professionals as well as on coverage and “claims-made” issues.
Fisher can be reached at 310-322-1301 or by email at email@example.com.
A Course on Occurrence Versus Claims Made Forms
On February 25, 2010, the Insurance Journal Academy of Insurance hosts a Webinar on the differences between occurrence and claims made coverage forms. During this class, participants will learn:
- The coverage triggers for both “occurrence” and “claims made” forms;
- The four legal theories applied to determine when an injury or damage occurs;
- What BERP’s and SERP’s are, when they should be used and their limitations; and
- The problems created when a client moves from one coverage trigger form to another.
To register for this class, click here.