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How Claims Made Coverage Actually Works

Most commercial liability policies are written on an Occurrence Form basis, meaning that the policy in effect when the loss occurs is the policy that responds to the claim.  The claim against the insured could be, and often is, made long after the loss occurs.  Business Auto Policies and most Commercial General Liability (CGL) Policies, for example, are written this way. But, what happens when you have Claims Made Coverage and not a CGL?

Understanding Claims Made Coverage

With a Claims Made policy, the policy that is in effect when the claim is made is the one that responds to the claim.   The incident or accident that resulted in the claim needs only to have occurred after the retroactive date shown on the policy, not necessary during the policy period.   Coverages that are commonly written on a Claims Made basis include Professional Liability, Employment Practices Liability and Cyber Liability.

There are many things to be careful of when buying Claims Made coverage.  It is important, for example, that the policy’s retroactive date not be advanced when coverage is renewed or replaced.  If that happens, there will be a gap in coverage (which you really don’t want).

It is also important to understand how your Claims Made policy defines the word claim, because it is the making of the claim that triggers the policy coverage.  Claim could mean the filing of a lawsuit, but the definition likely includes written demands for money or even administrative proceedings. Claims Made coverage has strict claim reporting requirements, so it’s important to understand your responsibilities when it comes to reporting claims.

Lastly, when a business decides it no longer wants to purchase a certain type of Claims Made coverage, it’s important that it purchase an Extended Reporting Period.  This is an additional period of time during which claims can be made against the insured, even though the policy has expired.

There are many variables to consider when purchasing Claims Made coverage. Be sure to discuss them with your insurance adviser so that you understand how the coverage works and what to look out for in any proposed insurance policy.

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