What Is a Claims-Made Policy?

Insurance policies can be classified into two categories, depending on the time frame they cover. Occurrence policies protect against events that happen during the policy period, even if the claim is filed after the policy has lapsed. Claims-made policies focus on when the claim itself is filed, meaning they may cover those that arise from work conducted before holding the policy. However, after its expiration, emerging claims from events that occurred when the policy was active may be excluded. 

Example: Clive the contractor purchases a claims-made policy. The next day, a former client sues him for an incident from the previous year. His new policy should cover the claim. 

Some claims-made policies include retroactive dates to limit the extent of the coverage. In these instances, the event must have happened on or after the retroactive date to qualify for coverage. 

Example: Clive the contractor purchases a claims-made policy with a retroactive date six months prior. A former client sues him for an incident from the previous year. His new policy will not cover it. 

To lengthen the coverage of a claims-made policy, you may be able to add an extended reporting period (ERP), also known as tail coverage, once the policy is terminated. This provides coverage for claims made after the policy is canceled for events that occurred within the covered window.

Example: Clive the contractor cancels his claims-made policy but purchases tail coverage. A former client makes a claim for an incident that transpired during the policy window. While Clive no longer holds the policy, his former insurance carrier is still liable for the suit. 

Claims-made policies are most common for errors and omissions (E&O), professional, employment practices liability insurance (EPLI), and directors and officers (D&O) policies.

Benefits of a Claims-Made Policy

• Continuous Coverage: If you’ve maintained coverage continuously, a new claims-made policy should extend to incidents that took place while you had insurance with a different carrier. However, if you have gaps in coverage, you may need to reset your retroactive date by purchasing nose, or prior acts coverage. 

• Lower Initial Premium: Most claims-made policies have lower premiums than occurrence policies, which may be good for your company’s bottom line, especially if you’re unlikely to face costly lawsuits. 

• Adjustable for Current Risks: The legal environment and your economic conditions may change over time. Claims-made policies allow you to modify your coverage levels to better reflect your current risk level. 

Potential Drawbacks of a Claims-Made Policy

• Aggregate Policy Limits: Claims-made policies traditionally have a cap on total claims over the life of the policy. If you have frequent or costly suits, you may have less protection against future incidents.

• Switching Carriers: Since claims-made policies are more complicated, changing to a new insurer can be difficult. Policyholders should take care to avoid gaps in coverage, since these may put your business at risk.

• Cancellation Ends Coverage: If you choose to discontinue your policy, your coverage will end unless you purchase tail coverage. Even if the incident occurred while you held the policy, the carrier will not be liable if a claim arises after termination. 

When working with third-party vendors and contractors, maintaining up-to-date certificates of insurance (COI) is critical to mitigating risks, but also presents challenges. bcs makes COI tracking easier, so you can focus on what you do best. Contact us today to learn more.