Retroactive Dates Limit Protection Provided by ‘Claims Made’ Policies

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by Fred Fisher, JD

“I hate my insurer,” says the client. “All they ever want to do is settle the claim… after throwing my deductible out the window.” Brokers have heard this for years, and as errors and omissions policy holders, many may even think it themselves. Insureds might even consider handling a “minor claim” themselves to save the deductible and keep the renewal premium in line (since it is assumed that reporting a claim makes the rates go up).

This flawed thinking caused many insureds to delay reporting a claim made during the policy until a trial was looming, perhaps even a year or more after policy expiration; perhaps even after changing insurers. Despite the policy condition that the insured was to report claims or suits immediately or as soon as practical, many appellate courts ruled that the insurer had to show prejudice if the insured didn’t comply. In other words, that a “different result would likely have occurred.” This means that the insurer could have effectuated a better finding (i.e. the insured would not have been found liable or the amount of the settlement would have been different, etc.); a difficult test to prove.

One New York-based insurer decided in the late 1980′s to fix this problem; after all, the “claims made” form was devised to provide actuarial certainty no “incurred but not reported” claims would hit the policy once it expired. The “claims made and reported form” was introduced, intentioned to force insureds to report any claims and not hold on to them for a long period. Rather than placing this provision under the “conditions” section of the policy, the industry chose to make it part of the Insuring Agreement. Being in the Insuring Agreement gave the insurer a better chance the wording would hold up in court.

This change created three coverage trigger conditions:

1) The claim must be first made against the insured during the Policy term;
2) The wrongful act or error must take place subsequent to any Retro/Prior Act Date; and
3) The claim must be reported to the insurer during the policy term.

These conditions would largely become the industry standard for the next several years. Underwriters couldn’t copy and paste fast enough; especially after a California Appellate Court upheld the language joining those that had in other States.

Yet, not all of the executive liability insurers followed the crowd in changing their reporting requirements. And those that followed suit did so without applying a prior acts date limitation.

While designed to penalize those who held on to claims for whatever reason, it was quickly determined that the innocent insured might suffer. Questions arose about uncontrolled circumstances such as the last minute suits served on the cusp of a renewal, or the executive responsible for reporting the claim being on vacation, or ill. Would anyone know what to do or even be aware of the policy’s reporting provision that, in essence, slammed the window shut at midnight? The industry quickly responded with an automatic reporting provision commonly known as the Basic Extended Reporting Period (BERP) that allowed a short reporting extension following policy expiration:

The Company further agrees that the Insured may have up to, but not to exceed, 60 days (sometimes 30 days depending on the company) after the policy expiration to report in writing to the Company a claim made against the Insured during the policy period, if the reporting of such claim is as soon as reasonably possible.”

(Terms in bold are defined in this particular policy.)

Not every insurer adopted this provision. The duty fell on the agent and the insured to know the policy provisions.

The decade of the 90′s and the beginning of the new millennium saw few “claims made” advancements.

Prior and Pending Litigation in Executive Liability & the BERP

Executive liability underwriters, for whatever reason, did not immediately follow their errors and omissions underwriter counterparts’ lead in the adoption of a “prior acts”-type (retroactive date-type) requirement. One can only guess what prompted the addition of a risk modifier after years of providing pure “claims made” protection.

Underwriters on the executive liability side eventually enacted a risk modifier; but unlike errors and omissions underwriters, they deciding to not tie the coverage date modifier to the actions of the insured, but rather to the actions of the injured party. For example, if the professional commits the wrongful act or error before the “prior acts date” (as used on the errors and omissions side), no coverage is provided by the policy. In contrast, it does not matter when the insured committed the act if a “prior and pending litigation” form is used, only when the injured party filed suit. If the suit was filed after the prior and pending date, coverage applies.

Prior and pending litigation date is also known as the: “continuity date,” “first coverage date,” “P/P date” or “administrative proceeding” date – depending on the form and insurer.

Adopting this language into executive liability forms changed coverage requirements. Now:
1. The claim against the insured had to be first made during the policy term;
2. The first notice of litigation or possible litigation, in the form of a service of suit or administrative agency notification, must occur after the specified prior and pending litigation date (often found on the declarations page); and
3. If the policy contained a reporting requirement, the claim must be reported to the insurer during the policy term or any automatic basic extended reporting period.

Institution of this “continuity date” complicated matters for new policy holders. Since the date is referred to as the “first coverage date,” the prior and pending date would, absent prior coverage, be the INCEPTION date for the first time executive liability coverage “claims made” buyer. However, like their errors and omissions counterparts’ use of a prior retroactive date, executive liability underwriters would honor an existing prior and pending litigation date at subsequent renewals, even if the insured changed carriers.

Executive liability renewal applications using a prior and pending litigation date, oddly enough, did not contain any warranty questions to uncover known claims or litigation that might give rise to a suit. One underwriter once stated that they didn’t want to break the chain of continuity” even though they couldn’t define the term. In fact, the policy simply defines “continuity” as the date specified on the declaration page and no further explanation is provided.

It’s Only Getting Better

To this point, errors and omissions coverage and executive liability protection have remained separate in their application of individual risk modifiers – prior acts vs. prior and pending litigation wording. The next installment details the problems created when these two separate modifiers collide in one form. Hold on and get ready to review the agency’s own errors and omissions policy.

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. They specialize in insuring Professional Liability risks. 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 has lectured extensively on professional liability loss control and authored over 60 articles in trade journals and periodicals. He is the author of BROKER BEWARE, Selling Real Estate within the Law, a loss control program for realtors. He is the designer of a program to assist agents to conduct on site pre-underwriting risk management assessments of a client’s professional liability exposures on behalf of Insurance Producers, Real Estate professionals and Lawyers.

In 1989 Fisher became a founding member of the Professional Liability Underwriting Society (PLUS). He was elected to the PLUS Board of Trustees in 1993; and in 1994 he was elected secretary-treasurer and a member of the executive committee and re-elected to this position in 1995. In 1996, he was elected vice-president and moved into the presidency in 1997. In addition to these roles, Fisher was chairman of the finance and budget committee and the communication committee. He previously had been a member of the PLUS education committee, and was co-chair of the national membership committee. He remains a member of the industry panel responsible for overseeing and contributing to the Registered Professional Liability Underwriter (RPLU) program guides. He 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 ffisher@e-o.com.

(Editing by Christopher J. Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA)


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Comments

  • March 27, 2009 at 7:27 pm
    Christine says:

    This series is absolutely wonderful – and ey opening. I ahd no idea thiese policies are so complx. I am learing a lot and shopuld be ble to bete serivce my clients as a result. I look forward to reading the other installments.

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