What are “Claims Made” policy Wordings?
The quick definition
“Claims Made” works on the basis that the policy responds to any claims first made to the insurer for any past work performed. So if you have performed the work two or three years ago and your client at that time decides now to make a claim against you for an act, error or omission because of that past work performed, it is the policy currently in force at the time the potential claim is made that will respond.
However it can still be complicated which is the reason we have expanded this further as follows.
Please read on…….
If you are able to acquire even a basic understanding of your Professional Indemnity policy – what triggers the policy, what constitutes a claim and the notification issues that flow from these concepts – you will be far better placed to manage your exposures and develop effective internal procedures to deal with these types of risks.
With a liability policy, you are essentially buying protection against certain loss or damage claims being made against you.
In order for a claim to fall within the cover provided by the policy, it must first and foremost fall within the parameters of its ‘insuring clause’. This is referred to as ‘triggering’ the clause. It’s also important to be aware of any exclusion clauses that apply. Likewise, policy extensions (automatic or otherwise) may also come into play, effectively increasing the breadth of cover.
Occurrence v claims-made policies
Most general liability wordings (e.g. public and product liability) are underwritten on a ‘loss or claims occurrence’ basis (i.e. the policy is triggered by an event, like someone falling over and injuring themselves on your premises). It is the date that this event occurred falling between the start date and the expiry date of an Insurance policy, which will respond.
In contrast, the trigger for a ‘claims-made’ policy is not the occurrence of the event itself but the initiation of the claim against the insured. This is an important distinction.
So the actual event may have occurred two or three years ago but it is only now the client brings a claim against you. Instead of going back to the policy that was in force two or three years ago, you claim from the policy in force at the time that they informed you first that they were going to take action against you for their financial loss.
Such covers are ideally suited to certain professions where you are providing advice over a period of time but no actual date of the event which caused the loss can be accurately given.
The scenario leading to them wanting to make a claim against you needs to have occurred after the retro-active date set into the policy. So long as the allegations of the act, error or omission occurred after this date, and you have a current policy in force at the time action was threatened or alleged, then this policy should respond.
To summarise then, assuming there are no other impediments to cover (e.g. prior knowledge of a potential claim), your current claims-made policy would provide you with insurance for the event even though it occurred several years ago.
Whereas with a “loss occurring” or “claims occurring” wording, the relevant insurer for the claim would be whoever insured the risk three years ago – a very different scenario.
Advantages and Disadvantages of “Claims Made” policies
The advantages of “Claims Made” policies is that you can make sure that you have the most up to date sum insured to meet claims made against you. When the alleged error or omission or wrongful act occurred could be quite a few years earlier when costs awarded by Courts were a lot lower (mainly because it did not cost as much to fix it up). However, this is not perfect as matters brought to the Courts can take a few years to resolve and settle.
The other advantage, is you do not have to remember who the insurer was several years ago when the event occurred. They may have even gone out of business leaving you with no cover (i.e. HIH in 2001). You are claiming from the policy that is current when someone first makes a claim against you.
However there are disadvantages too. It means Professional people or their Companies need to maintain their cover, even if they have retired or sold their business. Unless the Company buying your business is prepared to pick up any possible unknown claim made against you as part of the sale of your business, you as the former owner would be liable. So you need to effectively “run off” your risks.
The other complication can be whether the matter brought to your attention as a possible claim, is actually a claim. It is likely to be a circumstance that may give rise to a claim, so it is best to play safe and report it to the insurer.
It is important to understand what constitutes a ‘claim’ under the policy and how to recognise occurrences that could escalate into claims and know exactly what to do in that situation.
Basically, a claim is what the policy says it is. The most important thing you need to remember is that definitions and conditions can vary from policy to policy. More often than not, claims are defined to mean legal proceedings (at least), but they can also include ‘an oral or written demand for compensation made by a third party against the insured’.
In the case of a letter of demand or oral demand for compensation, the policy’s definition of claim should be reviewed. Where the claim is not defined in the policy wording, the common law meaning will apply (something along the lines of a communicated assertion of a right by a third party).
When a claim is made against you within the policy period, you are generally obliged by the PI policy to notify your insurer as soon as is reasonably practicable. If you fail to do this, you will be taking a substantial risk that the insurers will not accept the claim.
The test here is if the insurer is prejudiced by this failure to report. There is no definition of a “circumstance” in a policy but generally a circumstance is deemed to be a claim.
Providing notification of the claim puts the ball squarely in the insurer’s court in respect to policy coverage. Section 54 and Section 40(3) of the Insurance Contracts Act 1984 provides some protection to the Insured in certain circumstances.
Dealing with facts or circumstances
Some PI policies include a provision that allows the policyholder to notify their insurer if they become aware of facts or circumstances that could give rise to a claim. For example, an engineer finds out that the bridge he consulted on has developed cracks and may collapse. This is known as a ‘deeming clause’.
How it operates is that if a claim eventually arises out of the notified facts then, irrespective of when the claim is made (e.g. it could be many years after the insured discovered the problem), it will be dealt with under the policy that was current when the insured notified the facts.
Following a relatively recent legal decision, many insurers have redrafted their PI policies (and other claims-made policies). Virtually no insurer includes a “deeming clause” any longer in their policies. They instead refer to their policies as “Claims made and notified” policies and rely on a legal interpretation.
They rely on Section 40 (3) of the Insurance Contracts Act. Essentially, this section mirrors the operation of a deeming clause in many ways. In the absence of such a clause, you should still notify your insurer of any facts that concern them.
To simply ignore any potential issue or circumstances would be a dangerous strategy for any insured. This is because if a claim does arise from these facts, a subsequent insurer (or possibly even the same insurer in a subsequent policy period) may be able to exclude the claim from cover by virtue of the fact the insured was aware of the facts (or should have been) and/or should have disclosed them.
You have little to lose by notifying facts or circumstances to your insurer and much to gain in terms of peace of mind.
If you still do not understand “Claims Made” policies
It is most important as your Broker that you understand how your “Claims made” policy operates. If you do not have a basic understanding, please do not hesitate to call me for assistance.
Please understand the importance of promptly notifying potential problems (and actual claims) to us so we can assist you. We can also help you put in place processes or systems to capture potential issues and bring them to the attention of relevant people in your business. This could be as simple as us making a phone call to you each quarter to discuss any issues or for more complex businesses, it may be worthwhile implementing a formal written or software-based internal procedure or Application that all business managers must adhere to.
If ever in any doubt as to your situation, do not hesitate to call me to discuss.
If an insurer appears to be obstructive when responding to a notification of circumstances, we will assist in making sure that it is dealt with appropriately. We have over thirty years of experience in handling such claims issues with great success.
CPR are experts who will save you!