Claims Made Versus Claims Made and Reported Policies
It sounds like a subtle difference or a matter of semantics. However, the differences between a “claims made” insurance policy and a “claims made and reported” policy are significant.
Most professional liability insurance policies are written in one of these two forms. When you purchase professional liability insurance, you must understand these differences, so you can make an informed decision about which policy is the right choice for you.
What is a Claim?
The first thing you need to understand is the definition of a claim as it applies to both types of coverage. A “claim” is the official notice to you, or your business (the insured party) of an incident covered by your professional liability protection or insurance has taken place.
The legal importance is this. From the moment of notification, even if it’s the form of an email or someone telling you in person, the claim has been made. A claim does not necessarily mean you are being sued at this time.
Who Needs a Claims Made Type of Policy?
These types of policies are professional liability policies. This includes a lot of ground, though, such as:
- Directors and Officers
- Employment Practices Liability
- Lawyers Professional Liability
Practically any industry that warrants professional liability coverage can be affected by the differences between claims made or claims made and reported policies.
Claims Made Insurance Protection
Claims made coverage offers protection from injuries or losses if the claim is made during your policy period. However, this type of protection does not require you to report that claim during your coverage period.
Claims made insurance coverage offers broader protection and allows for more liberal reporting requirements than claims made and reported policies.
However, the primary distinction between the two policies revolves around the timing of reporting claims. A claims-made policy only requires you to report the claim promptly, or “as soon as practicable.” This does not necessarily require the notification to occur during the policy term whereas the claims made and reported policy requires both to occur within the same policy period.
Language in your policy indicating that it is a “claims made” policy rather than a “claims made and reported” policy includes the following, according to the Independent Insurance Agents and Brokers of America, Inc.
- “This is a claims-made policy which applies to ‘claims’ first made during the policy period or any extended reporting period.”
- “We will pay on behalf of the insured ‘loss’ for which the insured is legally liable caused by a ‘wrongful act’ committed by an insured arising out of ‘professional services’ rendered to others.”
- “Claims first made against the insured during the ‘policy period’ arising out of a ‘wrongful act’ taking place on or after the retroactive date.”
The bottom line is that they will pay for claims arising from the period of coverage even if they were not reported until a later date.
Claims Made and Reported Coverage
Claims made and reported policies require claims to be made and reported within the same policy period.
This policy is less expensive than most “claims made” policies. However, it is far more restrictive in the language and protection it provides.
Language you may find in a “claims made and reported” policy as opposed to a “claims made” policy includes the following, according to the Independent Insurance Agents and Brokers of America, Inc.
- “We agree to pay on behalf of the insured such ‘loss’ to which this insurance applies sustained by the insured by reason of liability imposed by law for ‘loss’ caused by any ‘wrongful acts’ committed by the insured, arising out of the conduct of the business of the insured in rendering services for others.”
- “This insurance applies to ‘wrongful acts only if the ‘wrongful acts’ did not occur before the retroactive date, if any, shown in the declaration or after the end of the policy period, and ‘loss’ because of the ‘wrongful act’ results in a ‘claim first made and reported to us, during the policy period.”
What you need to know is how they affect you in your professional life.
Real World Example
Carrier A offers a claims made policy that provides protection for an insurance agent for the policy period beginning July 1, 2008, and ending July 1, 2009. On June 27, 2009, the agent is served with a lawsuit claiming agent failed to provide a client with the appropriate coverage.
In July 2009, the agent switches carriers moving his policy to a different company that offers claims made and reported policies. Then the agent reports the claim to Carrier A on August 4, 2009.
Here’s what will happen.
Since the policy with Carrier A was a claims made policy, the policy will cover the incident even though it was made in one policy period and reported in another one.
Had the coverage been with a claims made and reported policy instead, the claim would have been denied because the policy was made in one policy period and reported in a different one.
Even had the agent continued with the same company for the next coverage period rather than switching provider, the claims made and reported policy would have denied coverage as each policy period is distinct and strictly enforced.
What’s the lesson to learn from all of this?
Even with continuous insurance coverage, a claims made and reported policy for professionals seeking liability protection has substantial gaps in coverage that may prove costly even though the policies themselves are typically less expensive than claims made policies. Keep these differences in mind and weigh the potential benefits versus the possible consequences before you choose your professional liability coverage.