As the rush of the holiday season approaches and the hours encroach on an insured's policy renewal deadline, I receive many last-minute calls, questions, and updates. One question that seems to come up frequently is “what exactly is a claim’s made policy, and how does it impact my renewal?”
A claims made is often misconstrued as occurrence coverage, but the two are not alike. Occurrence coverage is exactly as it sounds, insurance for services provided during the policy term. Unlike claims made policies, occurrence policies will provide coverage for an occurrence, even if it is reported long after the policy has expired. The claim at hand just needs to have occurred while the policy was in effect.
A claims made policy provides coverage for when a claim is made against an insured. This policy provides coverage regardless of when the wrongful act occurred, as long as the potential claim is reported during the present policy period and the insured has maintained coverage since the act occurred.
Benefits of a Claims Made Policy
Claims made policies offer specific benefits, such as, control over how the insured’s limit is built. By adding or removing various policy accessories the insured is able to create the policy that is right for them. The insured can choose their limits, deductible, and whether the defense expenses are inside/outside the limit of liability.
With a claims made policy, any policy limit updates and/or coverage changes automatically apply to the policy all the way back to the firm’s prior acts date. For example, if an insured was to increase their limit to $1,000,000 in the policy term for 2018, but a new claim is reported with the negligent act occurring during the 2017 policy term, the claim would now be covered with 1M limits. Whereas an occurrence policy provides a separate limit for each year coverage is in place and is not retroactively adjusted with each change made to the policy.
Additionally, unlike occurrence policies, claims made policies start at a discounted rate. The only services being covered by the policy are the services done since the prior acts date, thus resulting in a discount for the first year. With each year that passes, all new services and all previous services going back to the first day the initial policy took effect is now covered, resulting in premium increases. These premium increases continue at a declining percentage until the firm is considered “mature.” This industry wide pricing structure is called step rate.
As coverage is maintained and prior acts build, claims made policies can build off of other claims made policies. Insureds can move coverage from one carrier to another and continue their coverage as long as their policy remains active between each carrier. Without consecutive coverage, other insurance companies will not pick up an insured's prior acts date and a gap will occur in the policy.
What Happens if There is a Gap in Coverage?
Gaps are another reason why it’s imperative to know if the policy you have is a claims made policy. When a claims made policy is not renewed by its expiration date, a gap occurs and the prior acts date of the policy is lost. This means any services performed leading back to when the policy started are no longer insured. For many insureds, this means a loss of a free tail policy upon retirement, death, or disability. A tail policy, formally known as an extended reporting period, covers the work of a firm when the policy is no longer active all the way back to its prior acts date.
Gaps in coverage can also affect the firm’s ability to acquire coverage form a new carrier. Before issuing policies, insurance companies look at potential insureds renewal history to see if there are significant gaps in coverage. Having gaps in coverage can affect the potential insureds ability to obtain coverage.
Those who suffer the most from a gap in coverage are the insureds who are close to retirement. If an attorney is planning to retire and wants coverage for work dating back to their prior acts date, they must purchase a tail policy. Premium for tail coverage can be quite costly. Long story short, it is extremely important to avoid gaps in coverage at all costs, so that it doesn’t cost you in the long run.
Gaps in policies can also occur when switching from a more robust policy to a more restrictive policy. It is important to review the entire policy when considering the possibility of moving your legal malpractice insurance coverage. Not all policies are the same.
In the midst of all the hustle, bustle and holiday joy, get to know your policy and don’t forget to renew! There’s nothing better than the gift of piece of mind that an insurance policy can give you.