Most professional liability policies are written on a “claimsmade and reported basis,” requiring claims to be made and reportedduring the applicable policy period.

Simple right? Not so fast. Insureds need to remember severalextremely important components that must be satisfied to ensurecoverage.

Ensure coverage

First, the obvious. Claims must be made against the insured duringthe policy period, which typically runs for one year. For example,if the policy period is listed from January 2, 2016 to January 2,2017, a claim would need to be made during those effective dates.If the claim was made prior to January 2, 2016, for instance onJanuary 1, 2016, it quite simply would not be covered under thepolicy. Similarly, if a claim is made after the policy period, forinstance January 3, 2017, it also would not be covered because theclaim would fall outside the policy period.

Second, all claims must be reported to the professionalliability insurance carrier within the same policy period in whichit is made, subject to specific exceptions. Using the exampleabove, if a claim is reported to the carrier on January 3, 2017(after the policy’s expiration date of January 2, 2017), the claimwould not be covered due to late reporting.

However, most policies offer the ability to report claims duringan extended reporting period, which can either be automatic orsometimes purchased depending on the carrier. The automaticextended reporting period of most policies is 30 to 60 days. Othersmay provide a generous 120-day automatic extended reporting period.Although the claim still needs to be made against the insuredduring the policy period, the extension allows the insured extratime to report a claim to the carrier after the policy hasexpired.

Reporting of circumstances

Another policy enhancement included within most professionalliability policies is the reporting of circumstances. A notice ofcircumstance is when insureds report to their carriers, during thepolicy period, a situation or event that they reasonably believemay result in a claim. There is usually a list of requirements thatneed to be met in order for the matter to qualify as a circumstanceunder a policy.

This list may include:

1. When and how the insured first became aware of thecircumstance.
2. The reasons for anticipating such a claim.
3. The nature and dates of the alleged circumstance.
4. Any alleged injuries or damages sustained from thecircumstance.
5. The names of potential claimants, if available.

If a circumstance is properly reported during the policy periodand accepted by the carrier, then any claim subsequently made inrelation to the circumstance will be listed as the date the carrieroriginally received notice, provided the issues and concerns relateback to the original notice of circumstance.

Related: Rates are steady, but losses are severe in theprofessional liability market

Any payments made against the policy will erode its limitsand the amount available to pay additional claims within the samepolicy period. (Photo: iStock)

So, hypothetically, an insured could report a notice ofcircumstance to the carrier and then three years later, if theclaim was made regarding the same incident that was previouslyreported and directly related to the original notice ofcircumstance, it would be covered under that prior policy. But, itmust be noted that most professional liability policies require thenotice of circumstance to be reported during the policy periodonly; circumstances generally cannot be reported within theextended reporting period for claims.

Retroactive dates

Furthermore, claims made and reported policies also often haveretroactive dates, which only provide coverage for services theinsured performed on or after a certain date. Generally speaking,the retroactive date is the first date the insured purchasedprofessional liability insurance and kept it continually,regardless of the carrier. If an insured decides not to purchaseprofessional liability insurance for a year, it would lose allprior retroactive coverage and the new retroactive date would bewhen he or she next purchased professional liability insurance.

For example, if an insured performed design services in 1991,but the policy has a retroactive date of 2010, there would be nocoverage for the insured’s services in 1991, because the insuredprovided them prior to the retroactive date of 2010. Therefore, anyclaim that is made with respect to the services provided prior tothe retroactive date is not covered.

Additionally, some policies have what is called a knowledgedate. In general, for there to be coverage under the policy, theinsured (usually a principal, manager or executive of the insured)could not have known or expected their actions would give rise to aclaim prior to the knowledge date. For instance, the policy isissued with a knowledge date of January 2, 2016. If the insured hadknowledge on October 1, 2015 of a wrongful act or pollutionincident that might give rise to a claim, there would be nocoverage for that claim.

Supplementing coverage

Today’s policies also offer the opportunity to purchasesupplemental insurance providing additional coverage for specificcircumstances. For instance, if the insured receives a subpoenarelated to the rendering of its professional services, there isusually claim prevention coverage that will provide a mechanism forthe insurance carrier to hire an attorney and help the insuredrespond to subpoenas.

Another important distinction is that most claims made andreported policies have eroding liability limits, meaning that claimexpenses and indemnity payments made in excess of the applicabledeductible will erode the policy’s limits. If the insurance companyreceives a notice of claim from the insured and retains defensecounsel, the attorney’s fees and costs erode the policy limit.Additionally, if there is a settlement, the settlement paymenterodes the limit.

All details have significance when filing a claim and thebenefits of knowledge far outweigh the many costly andtime-consuming alternatives. (Photo: iStock)

For example, the insured has a policy with a $10,000 deductibleand a $1,000,000 per claim/$1,000,000 aggregate policy limit ofliability. If defense costs are $40,000, the insured will pay thefirst $10,000 pursuant to its deductible obligation, and theinsurer will pay the remaining $30,000.

If the claim settles for $100,000, the insurer will also makethe indemnity payment since the insured’s deductible obligation wassatisfied by payment of claim expenses. After the matter isresolved and the claim file is closed, the insured will have apolicy limit balance of $870,000 ($1,000,000 - $30,000 - $100,000 =$870,000) to respond to any other claims or circumstances (thatlater become claims) reported during the applicable policy period.Payments for the supplemental coverages do not erode the policylimits.

Details have significance

However, no matter the insurance form, it is imperative forinsureds to report claims or notices of circumstances to carriersas soon as possible and fully understand the policy terms. Allpolicies vary among carriers and have differing sections, such asan insuring agreement, which specifies the scope of coverage thatthe insured has purchased; definitions that define policy terms;exclusions that provide certain limits to coverage; and provisionswhich further explain the conditions covered within the policy.

Unfortunately, the old saying about “not sweating the smalldetails” just doesn’t apply here. All details have significancewhen filing a claim and the benefits of knowledge far outweigh themany costly and time-consuming alternatives.

Wayne Marshall is a senior vice president and professionalliability claims manager for Berkley Design ProfessionalUnderwriters (a W. R. Berkley Company), a provider of commercialproperty casualty insurance and risk managementprograms. Walter J. Adams is a vicepresident and senior claims examiner for Berkley DesignProfessional Underwriters. For more information pleasevisit www.BerkleyDP.com.

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