Claims-Made Coverage

Updated on February 22, 2024
Article byKhalid Ahmed
Edited byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Claims-Made Coverage?

Claims-made coverage refers to the policy providing continuous coverage for acts occurring prior to the policy’s inception and reported during the policy period, as long as the insured has maintained regular coverage. It facilitates the payout of claims furnished within the policy tenure, irrespective of the time of occurrence of an incident.

Claims Made Coverage

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The claims-made coverage trigger must occur before a specific liability is applied to the insured. Many businesses use it to safeguard their assets, especially to mitigate errors and omissions (E&O). In other words, companies mostly use it to cover any possible error related to errors and omissions (E&O) in financial reporting.

Key Takeaways

  • A claims-made insurance policy provides continuous coverage for previous losses until the insured keeps their insurance alive.
  • It aids in the easier settlement of claims submitted during the twelve months, regardless of when the duty violation or event occurs.
  • It does have initial lower premiums but does not offer coverage beyond its closure period.
  • It provides coverage to claims during active policy tenure without considering their time of occurrence. In contrast, the occurrence policy covers all loss claims, whether they happened during active coverage or not.

How Does Claims-Made Coverage Work?

Claims-made coverage is a policy that reimburses insurance claims for damage or loss incidents that occurred in the past, even if the insured had coverage with a different insurer. It becomes the preferred option when there is a delay between the claims filed and the occurrence of events. Some insurers even offer limited-type claims policies covering claims done with respect to the insured while being reported under the policy duration. It basically covers instances the one reports during an extended reporting or active policy period including the second criteria of occurrence after retroactive start-date of the policy. 

Insurers provide coverage for past incidents if the criteria are met. After making claims during force-trigger coverage, the insurer will save the policyholder and pay the claims. However, all claims must be made only during the active policy period by the insured; otherwise, the claim gets rejected. Plus, the insurer won’t hear any claims if the policyholder allows the policy to lapse or cancel. 

Furthermore, claims involving incidents during the active policy period will be rejected if the policy expires and is not renewed unless tail coverage is purchased. Claims-made coverage can also help cover claims such as sexual harassment, discrimination, and wrongful termination. Claimants have the flexibility to file claims months after the incident, making it suitable for employment practices liability, which can be invoked to cover wrongful actions by company officers and directors. 

Examples

Let us take the help of a few examples to understand the topic.

Example #1

Let us assume that a small business, A, buys general liability insurance based on claims made. The policy becomes effective from February 1, 2023, and will remain active until January 31, 2024, with November 1, 2022, as a retroactive date. A loss incident happened on December 12, 2022, for which A made a claim on its insurer.

As the loss incident was reported within the policy tenure and took place after the retroactive date began, the claim is valid to be covered and reimbursed by the insurer. However, the policy would not have covered that loss if any incident or accident had happened before November 1, 2022.

Example #2

Suppose a company’s executive team, covered by claims-made coverage, makes decisions impacting the environment. A year later, shareholders expressed concerns about potential environmental damages and filed a lawsuit. The executives are protected with claims-made coverage, provided the claim is reported during the active policy period. This example portrays how this specific policy can safeguard against liabilities arising from ESG-related (environmental, social, and governance) issues.

Advantages And Disadvantages 

Companies must consider the benefits and losses of the policy before taking it up, as mentioned in the table below:

Advantages

  • It initially has lower premiums.
  • It comes with an option for tail coverage.
  • Provides tailored coverage to businesses.
  • All claims remain covered even with updated terms.
  • Useful for covering staff litigation or executive fraud.
  • Covers claims directed before the policy activation and retroactive date.
  • Modified claims-made coverage provides prepaid tail coverage with automatic activation.

Disadvantages

  • Contains the risk of reaching the policy limit.
  • Reporting time is limited.
  • Complications may arise when switching plans.
  • Premiums generally increase every year.
  • Insurers may not provide retroactive coverage for specific tenures, leaving businesses vulnerable to unreported or old claims.
  • If the insurer cancels or fails to renew the policy, no coverage remains for claims after these events.

Claims-Made Coverage vs Occurrence Policy

All business-related insurance falls under either of the two categories, but they have certain differences, as per the table below;

Claims-Made CoverageOccurrence policy
Provides coverage to claims during active policy tenure without considering its time of occurrence.Covers all claims of loss, whether they happened during the active coverage or not.
Offers coverage only when the policy is active.Can cover claims outside the tenure of the policy.
Initially, premiums are less costly, but as the policy continues, its rate increases.Policy premiums are higher due to the value and tenure of coverage
No provision for resetting the aggregate limit, leading to the need for tail coverage to cover claims outside the policy tenure.For concurrent policies, the aggregate limit resets annually.
Convertible claims-made coverage allows doctors to convert their claims-made coverage into occurrence coverage.Chemical spills can be taken as a valid example.

Frequently Asked Questions (FAQs)

1. What is the importance of claims-made coverage?

This type of coverage is useful for businesses as it protects against liability claims made during the policy period, even for incidents that occurred in the past. This coverage provides a financial safety buffer, ensuring that claims are promptly handled and reducing the risk of legal and financial implications.

2. Is claims-made coverage suitable for all businesses?

Its suitability depends on the business type and risk level. It’s commonly favored in professional sectors, offering cost-effective options. Still, businesses should assess their specific needs with insurance companies to determine the most appropriate coverage based on their business types.

3. What is a claim-made policy vs. a claims-made and reported policy?

A claims-made policy provides coverage for claims made during the policy period, while a claims-made and reported policy requires claims to be made and reported within the policy period. The latter offers a more stringent reporting requirement, ensuring timely notification of potential liabilities. 

This article has been a guide to what is Claims-Made Coverage. We compare it with the occurrence policy, and explain its examples, advantages, and disadvantages. You may also find some useful articles here –

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