Insureds may find themselves in the position of having to move from one liability coverage trigger form to another. Either from an “occurrence” form to a “claims made” form, or vice versa. One move has the possibility of a coverage gap, the other results in an absolute coverage gap. But most gaps can be filled.
Moving from an “occurrence” to a “claims made” form creates little chance for a coverage gap – based, of course, on which legal theory of “occurrence” is used and the nature of the insured’s operations. However, going from a “claims made” to an “occurrence” policy leaves an unquestioned gap in protection.
“Occurrence” to “Claims Made”
Keep in mind, if the insured is covered by an “occurrence” form, the policy in effect when the injury or damage OCCURS pays the claim. As long as the injury or damage occurred during the policy period the policy responds – regardless of when the claim is brought (subject to statutes of limitation and repose).
Insureds whose actions result in immediate or nearly immediate injury or manifestation of injury will likely experience no coverage gap. However, insureds whose actions may not manifest in injury for a long period of time may experience a gap in protection if the injury, according to the court, does not legally “occur” until some point after the “occurrence” form has expired (this is rather unlikely given the current insurance market).
Two possible options for closing this coverage gap are: 1) the insured can purchase a “discontinued operations” endorsement. It’s like tail coverage for an “occurrence” form; or 2) get agreement from the “claims made” carrier to provide full prior acts coverage (no retro date). The second is obviously the preferred option. If the application contains a warranty provision and the insurer does not feel it is picking up any undue exposures, the second option should be relatively easy to accomplish (in theory). If nothing else, get the underwriter to move the retro date back three or five years if possible.
(There are other uses for the discontinued operations coverage; but those are outside the scope of this article. The key to remember about the importance of discontinued operations coverage is that the policy only pays for claims that “occur” during the policy period; if the insured goes out of business or sells to another and cancels or non-renews coverage; they may have no coverage if “injury” or “damage” “occurs” at some point after the policy has ended.)
“Claims Made” to “Occurrence”
With a “claims made” form, three dates must be satisfied, the occurrence date, the policy effective date and the retroactive date. As long as the injury occurs after the retro date, the policy in effect when the claim is brought (not when the injury occurs) defends/pays the claim (as was explained in the previous post).
Insured’s going from a “claims made” to an “occurrence” form have a gap in liability protection. If the injury occurs during the claims made policy but the claim doesn’t arrive until after policy expiration, there is no coverage provided by either policy. Why? Because the occurrence form, as stated above, only pays if the injury occurs during ITS policy period; and the claims made form only pays if the CLAIM is made during the policy period. The example loss meets neither of these requirements because the injury occurred before the “occurrence” form existed; and the claim came after the “claims made” form expired – thus such loss is not covered.
The only way to avoid this gap is to purchase a supplemental extended reporting period (SERP) (aka a “TAIL”) endorsement before switching over to the “occurrence” form. The SERP, in simplified terms, allows the insured up to a specified amount of time following policy expiration to report a claim for any injury that “occurred” during the expired policy period and after any specified retroactive date (or prior and pending litigation date). The SERP states that it will treat such claims as if they were filed on the last day of the “claims made” policy. Some SERP’s reinstate the aggregate limits and some do not; a review of the form is required.
Short of a SERP, the insured has no usual and customary way to fill the gap created when moving from a “claims made” to an “occurrence” form. Some “occurrence” form carriers have agreed to provide “nose-”type coverage as a manuscripted endorsement onto the “occurrence” form. This is akin to prior acts coverage in the “claims made” form. The incidents of this endorsement’s use are rare and probably cannot be counted on to fill this gap. SERP’s may remain the only option.
The last two posts are, of course, very basic and simplified descriptions of the differences between “occurrence” and “claims made” forms and the problems created when going from one form to the other. Awareness was the goal of these two posts.
However, next Monday begins a five-part series detailing “claims made” coverage. The series explores the history of the coverage and the development of the two most common branches of “claims made” coverage: professional liability and executive liability.
“Claims made” policies are not created equal. The definitions can differ greatly and the interpretation of coverage, terms and conditions is not always clear in some “claims made” forms. The following series details these pitfalls and problems allowing the reader a better opportunity to understand the issues.
The series ends with three “rules” for choosing the best “claims made” form for the client. Knowing the “why” helps in understanding the “how” and “what;” this series clarifies all three.