This is the first in a series of posts relating to what we will call the “minefields” of claims made insurance coverage. Fifty years ago, most insurers issued liability insurance policies on “occurrence” policy forms. As insurers expanded their coverage offerings for professional and executive risks in the 1960s and 1970s, they began to use “claims-made” policy forms. Today, while most commercial general liability or “CGL” policies are issued on occurrence forms, claims-made policies dominate the marketplace for professional liability, D&O, fiduciary and other specialty coverages.
Claims-made policies differ from occurrence-based policies primarily in the method of triggering or activating coverage under the policy. These policies create unique challenges for policyholders both in connection with the reporting of claims as well as with the purchase of a policy with the appropriate terms, conditions and exclusions for the risks that the insured faces.
To understand claims-made coverage, it is important to start with a comparison of occurrence policy forms with claims-made forms. Occurrence-based CGL policy forms insure bodily injury or property damage that takes place during the policy period regardless when the claim is made against the insured. The “trigger” of coverage is when the claimant is injured or when the property damage takes place.
The trigger of coverage analysis with an occurrence-based form is not always simple, however. For example, in an asbestos toxic-tort case, it is frequently difficult to pinpoint the date of the occurrence because there is a latency period between the original exposure to asbestos and the manifestation of injury. Courts have developed different rules to determine the trigger of coverage in this type of latent injury case: (1) the “exposure” trigger, which applies the policy in effect at the time of the exposure to the harm; (2) the “manifestation” trigger, which applies the policy that was in effect at the time the injury manifested itself; (3) the “injury-in-fact” trigger, which applies the policy or policies that were in effect at any time actual injury occurred; and (4) the “continuing injury” trigger, which applies all policies in effect from the initial exposure through the manifestation of the injury.
Claims-made policies operate very differently. A claims-made policy provides coverage if the claim is made against the insured during the policy period, regardless when the injury took place (although most policies require the injury to occur after a “retroactive date” stated in the policy). Most claims made policies also provide that the insured must report the claim to the insurer during the policy period or during an “extended reporting period.”
There are four key differences between occurrence-based policies and claims-made policies. First, with a claims-made policy, the threshold event is a claim against the insured during the policy period. In contrast, occurrence-based CGL coverage looks to whether injury or damage occurred during the policy period.
Second, with a claims-made policy, it is the concept of a “wrongful act” (typically defined as an “act, error or omission”) that gives rise to coverage. With occurrence-based CGL policies, on the other hand, it is the bodily injury or property damage that gives rise to coverage, not the wrongful act by the insured.
Third, reporting to the insurer is an affirmative element of coverage that the insured generally must prove under the terms of a claims-made policy. The insured must notify the insurance company of the claim during a specified time period (either during the policy period or during the extended reporting period) or lose coverage. Under occurrence-based policies, notice is not an element of coverage, but a policy condition.
Because reporting is an element of coverage, most courts interpreting claims-made policies strictly enforce notice requirements. If the insured fails to provide notice within the required period under a claims-made policy, the insurer can refuse to cover the loss without proving that the insurer was prejudiced by the delay. In most states, if an insured fails to provide timely notice under an occurrence-based CGL policy, the insurer must provide coverage unless the delay resulted in prejudice to the insurer.
In future posts in this series, we will discuss the key coverage issues that arise under claims-made policies, best practices in providing notice to insurers under claims-made policies, and recommendations to policyholders regarding the purchase of claims-made policies.