Claims-Made Policies Can Be Hazardous to Your (Company's) Health
The most commonly purchased liability insurance policies, Commercial General Liability and Business Automobile Liability, cover injury and/or damage to property that occurs during the policy period. However, several types of liability insurance policies are customarily offered only on a claims-made basis, meaning they apply to claims made against an Insured and reported to the insurance company during the policy period or an applicable extended reporting period.
The most commonly purchased liability insurance policies, Commercial General Liability and Business Automobile Liability, cover injury and/or damage to property that occurs during the policy period. However, several types of liability insurance policies are customarily offered only on a claims-made basis, meaning they apply to claims made against an Insured and reported to the insurance company during the policy period or an applicable extended reporting period. Also, in order to be covered, the claim must have resulted from an event that took place after the retroactive date specified in the policy. Typical policies written on a claims-made basis include: Directors’ & Officers’ Liability; Employment Practices Liability; Professional Liability; and, most types of Errors or Omissions Liability.
Claims-made policies are not inherently bad and, in fact, there are some advantages to the use of this type of policy. But, there are some complexities not present in occurrence based policies that, as suggested by the title of this paper, can result in the loss of coverage if not understood and properly managed by policyholders and their insurance brokers.
In my previous article on this subject, I described a case in which an insurance broker sold a claims-made professional liability policy to an ambulance operator and failed to ensure that the retroactive date was set back to the date shown on the policy that was being replaced. The result of this failure was the denial of coverage in a death claim. The point of the article was that the “retro” date determines whether a wrongful act that results in a claim made during the policy period is covered by the policy, and getting it wrong can lead to financial disaster for the policyholder.
To read Part One of Claims Made Policies Can Be Hazardous to Your (Company's Health) that was issued in January of 2010, click here.
In this article, I will focus on another provision unique to claims-made policies that, if not dealt with carefully, can cost the policyholder a great deal of grief and money. This policy provision is usually termed the “Notice of Circumstances” or “Awareness Provision”. A typical clause might read:
“If during the Policy Period any Insured becomes aware of circumstances which could give rise to a Claim, and the Insured gives written notice of such circumstances to the Insurer during the Policy Period, with particulars as to dates and persons involved, then any Claim subsequently arising from such circumstances shall be considered to have been made during the Policy Period in which the circumstances were first reported to the Insurer. No coverage shall be provided for fees and expenses incurred prior to the time such circumstances result in a Claim.”
The Notice of Circumstances provision is a valuable and powerful tool used by Insureds in various situations, such as:
• The Insured is aware that on the next renewal its insurer will increase the Retained Amount (deductible) substantially; reporting circumstances of which it is aware during the current policy period will cause the claim, if ultimately made, to be covered subject to the current Retained Amount;
• The Insured has been sent a notice of non-renewal by the current carrier and would like to do what it can to have a clean loss record with a new Insurer;
• The Insured knows that the current carrier will be replaced upon renewal with a new carrier and it is likely that the Retained Amount will be higher and/or that the Limit of Liability will be lower; or,
• It is known that there will be a change in carrier on renewal and that a “New Business” application with a “Warranty Statement” will be required by the new carrier. If the circumstances that could give rise to a claim are disclosed in the New Business application, the carrier will likely exclude any claim arising out of such circumstances. If the circumstances are not disclosed, there is a possibility that a subsequent claim will be denied on the grounds that the applicant should have disclosed that there was knowledge of an event that could give rise to a claim under the policy and that failure to so disclose the matter is a material misrepresentation resulting in the policy being void ab initio.
In each of these examples, the policyholder can protect itself by giving notice of the circumstances that could give rise to a claim to the current insurer. Failure to do so could result in serious financial consequences for the policyholder.
Let us now consider a possible problem for the policyholder who gives his carrier a notice of circumstances. Assume that the event that prompted the notice of circumstances was a medical malpractice event involving a minor child and that a claim in the form of a summons and complaint is received by the policyholder five years after the expiration of the policy that was in effect when the notice of circumstances was given. The policyholder, doing what most policyholders do in similar situations, relied on its insurance broker to give the notice of circumstances to the insurance company. During this span of time, the insurer providing the primary coverage has changed and the insurance broker’s account executive, account manager, and claim coordinator assigned to the policyholder’s account five years earlier have all left the broker’s employ (not unusual in my experience) . To make matters much worse, the Retained Amount is now $1,000,000 each loss as compared with $250,000 five years earlier. What happens if neither the policyholder nor its broker remembers that a notice of circumstances had been given to the insurance carrier providing the coverage five years before? What happens if the broker cannot find any written evidence that such a notice had been transmitted to the insurer or, if transmitted, cannot find acknowledgment of receipt by the insurer? If the prior insurer denies having been given a notice of circumstances during its policy term, the dust will fly and an expensive legal process will undoubtedly commence.
So, what have we learned from this hypothetical but, unfortunately, realistic case?
1. A policyholder should, as required by the policy’s Conditions, provide written notice directly to its insurer, rather than rely on its insurance broker to do so, and should obtain a return receipt as proof of delivery.
2. It is essential for the policyholder to maintain an easily retrievable record of the notice and upon receipt of a claim to check on whether a notice of circumstance had been given.
3. If an insurance broker gives notice to an insurer on behalf of a policyholder, the broker should have a system in place for recording the notice, following up for the insurer’s acknowledgment, and for monitoring the matter so that if a claim is ultimately made, the prior notice of circumstances will place the claim in the intended policy term.
There are intricacies and potential pitfalls that even very experienced insurance professionals fail to fully appreciate. I have a friend who likes to say “Old age is not for sissies.” Neither are claims-made liability policies.