We recently received a question from a subscriber regarding a policy for an insured who moved coverage from a claims-made basis to an occurrence form. Under the claims-made policy the insured had a retroactive date going back to 2002, but the occurrence policy, while referencing a retroactive date of coverage, showed the same retroactive date on the declarations as the policy effective date, 4/18/2022.
So what happens when an insured decides to move from a claims-made policy to an occurrence based policy, or vice versa? How does this affect claims under each coverage form and how might the agent's errors and omissions be triggered?
First, we need to understand the difference between claims-made coverage and occurrence coverage. Stated simplistically, claims-made coverage provides coverage for claims that are made to the insurer during the policy term, for injuries, wrongful acts, errors or omissions, or whatever the coverage applies to (we'll refer to these as injury)—as long as such injury was not committed prior to the retroactive date shown on the policy. Conversely, an occurrence policy covers claims that occur during the policy term and there is no need for a retroactive date, since the date of the occurrence is what triggers the coverage.
Frequently, all related claims are deemed to have been made at the time the earliest related claim was presented or when the first circumstance leading to the first related claim was reported. This is of importance particularly in the case of abuse or molestation claims, where a perpetrator may act over a number of years against many individuals.
The retroactive date serves to preclude coverage for incidents that the insured knows about and that might have the potential to give rise to future claims. Let's look at this claims example: In 2012, a school principal receives several complaints from parents that their children are being abused by the physical education teacher. The principal tells the school board and the school board fires the teacher. The insurance agent is notified of the incident but no claim was made or reported. Six years later in 2018, one of the students submits a claim for injury arising from the teacher's abuse. Under claims-made coverage, the insured was made aware of the potential for a claim in 2012, but the claim was not made until 2018. The policy inforce in 2018 will be the policy triggered for the claim but since the insured was made aware of the claim potential in 2012, the policy retroactive date will need to go back at least as far as 2012 for the claim to be covered under the 2018 policy. If the retroactive date does not go back to 2012, coverage can be denied as the insured was made aware of the incident that could give rise to a claim, and the policy does not cover prior acts. Since the agent was made aware of the incident but did not report a claim at that time, a potential errors and omissions claim exists.
Given the same claim situation under an occurrence policy, the policy that will be triggered is the policy in effect in 2012 when the occurrence took place, even though the insured reported the claim in 2018. There is potential for claim denial as the insured knew or had reason to know that a claim could arise from the complaints of the teacher's abuse, and again there is the potential for an agent's E&O claim if they did not notify the insurer.
Some claims-made policies may not specify a retroactive date, or the retroactive date may be the same date as the effective date. In these cases, there is no coverage for an incident or injury that takes place prior to the effective date of the policy.
Here's a simplistic example of how an old claim just being presented for coverage will be treated under a claims-made policy, and under an occurrence policy:
ABC Corporation Claims-Made Policy
Effective: 6/1/2022-6/1/2023
Retroactive Date: 6/1/2000
Date of Injury: 9/1/2001
Date Claim Made to Insurer: 9/1/2022
In this case, the date the claim is made to the insurer is the policy that will be triggered for coverage—the current policy of 6/1/2022-6/1/2023, because the injury took place after the retroactive date of 6/1/2000, and it was not previously reported to an agent or insurer under any of the preceding policy terms. If however, the injury took place prior to 6/1/2000, there would be no coverage under this claims-made policy.
If this was an occurrence policy, the policy that will be triggered for coverage is the policy in effect 6/1/2001-6/1/2002, which is the policy term in which the occurrence took place, regardless of the date it was reported.
An insured should establish a retroactive date that coincides with the inception date of the insured's first (or expiring) claims-made policy, and should consider the purchase of a supplemental extended reporting endorsement under the expiring claims-made policy, unless it wishes to self-insure its prior acts exposure.
A claims-made policy will include a basic extended reporting period of time, such as 60 days following the end of the policy expiration. This gives the insured a limited period of time to report claims that take place during the expiring policy period. The unknown and unreported occurrence will be automatically covered under the expired policy only if the claim is first made within 60 days after the end of the policy period. There is no charge for this basic extended reporting period, aka tail coverage.
The basic tail and the option to purchase a supplement tail are provided if the policy is cancelled or not renewed—by either the insured or the insurer. They are also provided if the insurer renews or replaces the policy with one that either has a later retroactive date or applies on an other than claims-made basis.
The basic tail coverage is subject to the policy's aggregate limits. If those limits have been reduced by previous claims, the basic extended reporting period does not reinstate or increase the limits of insurance.
Some claims-made policies contain an Extended Reporting clause and others have an Extended Discovery clause. It is very important to distinguish between them. The Extended Reporting clause provides the insured with the right to purchase an Extended Reporting endorsement upon cancellation of the policy (unless cancellation is for non-payment). This endorsement specifies a period of time after policy expiration during which claims may be reported. However, only claims that arise from occurrences while the policy was in force are covered.
The Extended Discovery clause allows the insured to make a written report of their knowledge of an incident or occurrence that took place during a policy term, that may give rise to a claim at a later date. Then, if a claim should materialize after the policy expires or is terminated, the occurrence will be considered as having been made during the policy period.
A claims-made policy has the advantage of having current claims covered by the current policy, so the insured can purchase policy limits that correspond with the current economy and legal environment.
Although the basic tail provides potentially valuable coverage, it does not meet all insured needs in all cases. For example, consider the possibility that a reported occurrence might not result in a claim until five years and one day after policy expiration, or an unreported occurrence might result in a claim 61 days after policy expiration. In either case, the basic tail will provide no coverage. Unless the current policy is a claims-made policy with a retroactive date that goes back to the expired policy, there will be the possibility of uninsured claims unless the insured purchases the supplemental tail for additional premium, which provides for an extended reporting period of unlimited duration.
The supplemental tail must be requested by the insured in writing within 60 days of the policy's expiration. If the insured does not exercise its option within the 60 days, the insurer will have no obligation to sell the insured the supplemental tail endorsement. The cost is usually based on a multiple of the premium on the cancelled or expiring policy. The ERP coverage is typically purchased in one-year increments, up to five years, and sometimes longer – but as the tail period grows, the cost goes up, since the insurer is taking on additional risk.
If an insured has a continuous renewal with the same carrier under a claims-made policy, then there is typically no need to purchase the extended reporting period as long as the same carrier is providing the coverage. However, should the insured move coverage to a different carrier, or renew the policy on an occurrence form with any carrier, or simply go out of business, then there is the potential for a gap in liability coverage to occur if an injury occurs during a claims-made policy term, but no claim for damages is presented to the insurer until the occurrence policy is in place. For example, an insured has claims-made coverage in place for five annual policy terms, and renews coverage on an occurrence form the sixth policy term. The claims-made form provides no prior acts coverage and the insured does not purchase an extended reporting period. Six months into the occurrence term, the insurer receives a claim for injury that took place in the third policy term of the claims-made policy. In this case, there will be no coverage provided under any of the policies. Why? Because the occurrence coverage is triggered only if the injury occurs during its policy period, and the claims-made coverage only responds to claims made during the applicable policy period. As such, neither policy's condition is met and there will be no coverage.
If an insured purchases supplemental extended reporting period coverage, this extends the time period specified by that coverage during which a claim can be submitted to the insurer. The ERP does not extend the policy period, does not change the scope of coverage, nor does it increase the policy limits. A claim is covered by an extended reporting period only if it results from an injury that occurred before the claims-made policy expired.
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