‘Claims Made’ Coverage Tripped Up by the Trigger Language

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by Fred Fisher, JD

The Incident Reporting Provision

Nearly all “claims made” forms allow the insured to report a fact or circumstance that will likely or may give rise to a claim at some point in the future. If the reported act or error does evolve into a claim at a later date, the insurer to whom the incident was first reported will treat the claim as if it were first made during the policy term of the initial report.

Some insureds abused this provision and submitted a laundry list of “potential claims” to the insurer. The most common reasons for such abuses arose from insureds being non-renewed or changing carriers. Because of such attacks on this liberalizing language, and the industry’s attempt to avoid the submission of “possibilities,” insureds are now required to provide:
1. The specific details of the act, error or omission ….. that gave rise to the Circumstance;
2. The injury or damage which may result or has resulted from the Circumstance; and
3. The facts by which (the Insured)….first became aware of the act, error or omission….

The Incident Reporting Provision is not the same as the claim-reporting extension. An “incident” MUST be reported in sufficient detail prior to the expiration of the policy. The insured, absent language to the contrary, does not have any additional time beyond the policy period to report an incident. In contrast, a “claims made and reported form” allows the insured an additional 30 or 60 days (as discussed in an earlier section) to report a claim “first made during the policy term….” “Claim” and “incident” are not synonymous terms.

The Automatic Claim Reporting Extension and the Claim Reporting Condition

Since the “claims made and reported” wording was first adopted in the early 1990′s, it may have become the most common “claims made” wording used. As a result, most insurance practitioners have come to accept that not only must a claim first be made during the policy term, but to garner coverage, such claim must also be reported during the policy term (or any extension period if provided). Unfortunately some insurers, in their zeal to force insureds to report their claims in a timely manner, have taken a surprising and unconventional approach that may result in the denial of a claim for unsuspecting insureds. Some policy’s Condition sections now state:

The Insured shall, as a condition precedent to the coverage afforded by this policy, give written notice to the underwriters during the policy period of any claim made against the insured, but in no event shall notice to the underwriters be later than 30 (may be 60 or 90 days depending on the insurer) after any insured becomes aware of said claim.”

Not many would expect to find such an unconventional provision in the conditions section when the insuring agreement has already implied it is a conventional “claims made and reported form.” Thus an unexpected claim denial might result for an otherwise covered claim.

The Automatic Claim Reporting Extension and Renewal

Most brokers expect a “claims made and reported form” to give the insured some limited amount of time following the end of the policy period to report a claim first made during the policy term (most commonly 30 or 60 days). The purpose of this provision was to not penalize an insured who, in good faith, found it next to impossible to comply with the requirement of reporting the claim during the policy period. The preferred language was akin to:

“…the Insureds shall, as a condition precedent to their rights to payment under this Policy, give to underwriters notice in writing of such Claim as soon as practicable provided all Claims must be reported no later than the end of the Policy Period, in accordance the requirements of the Optional Extension Period (if applicable), or sixty (60) days after the expiration date of the Policy Period.”

While the above policy language is preferred and relatively unrestricted, new language is popping up with unusual and restrictive language; some is even illogical. New policy wording will only allow the reporting extension: “In the event of cancellation or non renewal of this Policy, by either the ‘Named Insured’ or the Company…”

If the policy is renewed, no last minute claims made against the insured are covered unless the claim is reported prior to expiration of policy. Neither will such claim be covered by the renewal policy since the claim wasn’t first made in that policy term. This wording almost behooves the insured to renew elsewhere.

There are still some “claims made and reported” policies in use requiring the claim be first made and reported during the policy term – never allowing for a post-expiration claim report.

The Automatic Claim Reporting Extension and Contradictory Policy Language

Consider a policy’s insuring agreement that reads:

Provides professional liability coverage for those wrongful acts that occur subsequent to the retroactive date stated in the declarations and which are first made against you and reported to us while this policy is in force. No coverage exists for claims first made against you and reported to us after the end of the policy term unless, and to the extent, an extended reporting period applies.”

The “Notice of ‘Claims’” wording in the conditions section of the above policy reads:

SECTION VII – CONDITIONS
Notice of “Claims”
• “As a condition precedent to our obligations under this Policy, you shall give written notice to us as soon as practicable, but in no event later than 60 days after the end of the “Policy Period” of any “Claim” made against you.&#8230
;”

In the same form, the Extended Reporting Period language states:
SECTION VIII – EXTENDED REPORTING PERIOD
1) In the event of cancellation or non renewal of this Policy, by either the “Named Insured” or the Company, for reasons other than non-payment of premium or material misrepresentation in the Application, you shall have the right to an Extended Reporting Period as follows:
(a) Automatic Extended Reporting Period
Coverage as provided under this Policy shall automatically continue for a period of sixty (60) days following the effective date of such cancellation or non renewal, but only with respect to “Claims” and “Wrongful Acts” committed before the effective date of such cancellation or non renewal
.

Claims received during the prior policy term but reported one day after policy expiration have been denied by the renewal carrier (same insurer) because the claim was not reported in accordance with the “Extended Reporting Period” provision since the policy was neither canceled nor non-renewed. Thus, if the policy is renewed, the insured must report even last-minute claims to the insurer prior to expiration. Such interpretation and denial completely ignores Condition VII – “Notice of ‘Claims.’”

The Automatic Claim Reporting Extension and Confused Policy Language

“Cut and paste” is a quick and expedient way for an insurance carrier to re-draft a policy to its own liking; but it helps to read the finished policy in its entirety once done creating it. A recently reviewed policy’s declaration page states:

• “Notice of claim must be given no later than 60 days after such claim has been made.”

Yet page one of the Coverage Section reads:

All coverage sections in Section I – Liability – cover claims first made during the policy period against the Insured alleging a …’wrongful act’ ….” (This is pure claims made wording.)

Going deeper into the form, the policy’s Condition Section requires:

• “As a condition precedent to coverage under this policy, the insured shall give the Insurer written Notice of any claim as soon as practical after…. Become(ing) aware of such claim, but in no event later than 60 calendar days after the termination of the policy period….”

Such extended reporting language is usually found in a “claims made and reported” form.

This policy form is obviously a mix of “pure claims made” wording and “claims made and reported” form language. The problem created by such amalgamated wording is deciding which takes precedence and exactly when a claim MUST be reported to avoid denial for not meeting reporting requirements.

The Automatic Claim Reporting Extension and Convoluted Policy Language

How long does the insured have to file a claim considering the following policy language?

A. Notice of “Claims”: As a condition precedent to coverage under this policy, the “Insured” shall provide written notice of any “Claim” made against any “Insured” as soon as practicable, but in no event later than the earlier of:
(1) Thirty (30) days following receipt of written notice of the “Claim;” or
(2) The later of the expiration date of this policy, the Automatic Extended Reporting Period or the optional Extended Reporting Period, if elected hereunder.

To answer the question, the policy and the claim-receipt scenario must be analyzed very closely. This is one of those “it depends” moments with the key phrase being “the earlier of….”

Assume, for example sake, that the policy renews January 1 and that the expiring policy has a 30-day automatic extended reporting period (aka “basic extended reporting period” (BERP)) with no Extended Reporting Period. If a claim is received on December 23, what is the date by which the insured must report the claim to avoid denial based on not meeting reporting requirements? January 22!

How is that date deduced? The form states that the insured must report the claim by the EARLIER of: 30 days from receipt or the “the later of” three dates. Looked at in comparison, the relative dates are:
• 30 days from receipt – January 22; or
• Expiration date – December 31;
• Automatic Extended Reporting Period date – January 30; or
• Extended Reporting Period date – not applicable.

The earlier of these two options is January 22 because the latest of the last three dates is January 30. In no event will the insured ever have more than 30 days to file the claim once it has been received; even if received during the supplemental extended reporting period (SERP).

The Automatic Claim Reporting Extension and Limited Extension Wording

The following policy wording only gives the insured 60 additional days to report a claim if the claim was first made against the insured during the last 60 days of the policy period.

IX. NOTIFICATION
A. In the event any Executive Officer becomes aware that a Claim has been made against any of the Insureds, the Insureds shall, as a condition precedent to their rights to payment under this Policy, give to Underwriters notice in writing of such Claim …….no later than the end of the Policy Period, in accordance with the requirements of the Optional Extension Period (if applicable), or sixty (60) days after the expiration date of the Policy Period in the case of Claims first made against the Insured during the last sixty (60) days of the Policy Period
.”

Agents and insureds cannot confuse this with the idea that the insured has a 60-day BERP. This provision avoids the penalization of an insured whose executive officer does not receive notice of a claim until near the end of the policy period.

The Automatic Claim Reporting Extension and Ridiculous Wording

Some forms don’t give the insured any additional time after expiration to report claims made before expiration unless the policy is canceled or non-renewed. The wording below really turns the policy into a 14 month policy; but again only if the current policy is canceled or non-renewed:

C. Extended Reporting Period:
1. If we or you cancel or refuse to renew this policy for reasons other than non-payment of premium; we will provide to you a 60 day Automatic Extension of the coverage granted by this policy, at no additional charge, for any claim first made against you and reported to us during the 60 day extension period but only as respects wrongful acts committed after the Retroactive Date (if any) stated in the Declarations and prior to the date of cancellation or non-renewal.

How can agents and insureds protect themselves from such nonsense?!

It Gets Worse Before it Gets Better

One more problematic definition is left, the definition of a “claim.” Knowing what qualifies as a “claim” is the key for the agent and insured to know when to report an incident to the insurer. The next post provides a chart with eight different definitions of a “claim” to allow the reader to compare and contrast the differences among the carriers.

The series ends with three key recommendations for finding the best “claims made” policy for any client.

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 31, 2009 at 1:50 pm
    Sevara says:

    I cannot remember a more educational service than this series. Thank you – thank you – thank you- I wish all of the articles posted were this informative and useful. I ‘m sharing these posts to everyone in our agency

  • April 1, 2009 at 5:27 pm
    Art Long says:

    I would have to agree with other posters that your series of articles is VERY well written and VERY helpful in understanding some very complicated coverage issues.
    Art Long CPCU, AIC

  • April 1, 2009 at 7:47 pm
    Fred Fisher says:

    Thank you Art for the kind Comments. It’s been 20 years since I last wrote a “History of the From” – and much has changed indeed. Hopefully, this series will lead to positive changes in the Industry. I am quite weary of hearing how I am the only one pointing out these issues or worse, underwriters saying “It’s not my job to train the Broker”- when in fact it is the Underwriters job- these forms and hazards are all way too complex for any one to know them all.

  • April 1, 2009 at 11:39 pm
    Cathryn Milazzo says:

    Fred:

    Many kudos to you! Your accumulation and distillation of the of varying Claims-Made forms in the marketplace serve to be an invaluable tool to those of us who function as a conduit of information for our retailer/clients.

    Thank you for imparting the benefit of your pursuit of academic excellence and keeping the insurance community on track!

  • April 2, 2009 at 12:54 am
    Jayant Kumar Singh says:

    Ferd – You have written Excellent Articles and thanks a ton for pointing out the lacuna .
    Keep it up .

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