The Ins And Outs Of Claims-Made Insurance
Claims-made insurance policies have become increasingly popular recently, particularly for professional liability, directors, and officers’ insurance. This policy provides benefits only if a claim is filed while the policy is active, and if a policy is canceled, there is no coverage.
Claims-made policies differ from occurrence-based policies, which cover events during the policy period, regardless of when a claim is filed.
Understanding the ins and outs of claims-made insurance policies is essential for anyone considering this type of coverage. This article will explore the critical features of claims-made insurance, including how it works, its benefits and drawbacks, and its potential risks and challenges.
By the end of this article, readers will have a clear understanding of the unique features of claims-made insurance and be better equipped to decide whether it is the right choice for their insurance needs.
- Claims-made insurance policies only provide coverage if a claim is filed while the policy is active.
- Claims-made policies have lower initial premiums than occurrence policies, but premiums increase with renewals.
- Claims-made insurance can cover claims related to incidents under previous claims-made policies with different carriers as long as coverage is continuous.
- Canceling a claims-made policy can create a coverage gap, requiring an extended reporting period or tail coverage.
How Claims-Made Works
Claims-made insurance policies are a type of insurance that operates by providing coverage only if a claim is filed while the policy is active. There is no insurance coverage if a policy is canceled and a claim is reported later.
Insurers typically use claims-made policies for professional liability and directors’ and officers insurance. These policies have coverage triggers and policy limits that differ from occurrence-based policies. Coverage triggers for claims-made policies require an active approach when filing a claim.
Insurers can cover claims related to incidents under previous claims-made policies with different carriers as long as coverage is continuous. Policy limits for claims-made policies have per-incident and aggregate limits that define how much carriers will pay for a covered loss.
The aggregate limit for a claims-made policy remains fixed for the policy’s lifetime, while occurrence policies reset each year. This means claims-made policies have lower initial premiums than occurrence policies, but premiums increase with renewals.
While claims-made insurance provides continuous coverage for prior acts as long as the policy is active and maintained continuously in the past, using the approach might leave insufficient protection for future claims.
Key Differences from Occurrence Policies
The main contrast between claims-made policies and occurrence policies lies in their coverage triggers and limits. Occurrence-based policies cover losses during the policy period, even if the procedure is no longer active. In contrast, claims-made policies only provide benefits if a claim is filed while the policy is active. There is no insurance coverage if a policy is canceled and a claim is reported later.
In terms of understanding coverage triggers, it is essential to note that claims-made policies can cover claims related to incidents that happened under previous claims-made policies with different carriers as long as coverage is continuous.
However, claims-made policies have per-incident and aggregate limits that define how much carriers will pay for a covered loss. The aggregate limit for a claims-made policy remains fixed for the policy’s lifetime, while occurrence policies reset each year.
While claims-made policies have lower initial premiums than occurrence policies, premiums increase with renewals. Therefore, it is essential for policyholders to carefully evaluate the risks and benefits of each type of policy before making a decision.
Benefits and Drawbacks
One factor to consider when evaluating different insurance policies is their relative advantages and disadvantages. Claims-made insurance policies have benefits and drawbacks that businesses should weigh before deciding.
One benefit of claims-made insurance is that it often has lower initial premiums than occurrence-based policies. Additionally, claims-made policies provide continuous coverage for prior acts as long as the policy is active and maintained continuously in the past.
However, there are also potential drawbacks, such as coverage gaps if a policy is canceled or a claim is reported after the policy has expired. Cost comparisons between claims-made and occurrence-based policies should also be considered, as claims-made policies may increase premiums with renewals and only provide fixed coverage limits.
It is essential for businesses to carefully evaluate their needs and weigh the benefits and drawbacks of different insurance policies before making a decision.
Frequently Asked Questions
What common types of claims would be covered under a claims-made insurance policy?
Common claim types covered under a claims-made insurance policy include professional liability, directors and officers liability, and errors and omissions. Coverage limits are defined by per-incident and aggregate limits, which remain fixed for the policy’s lifetime.
Can a claims-made policy be canceled mid-term without penalty?
A claims-made policy may be canceled mid-term, but penalties may apply. Pro-rated refunds may be available. Alternatives to claims-made insurance, such as occurrence-based policies, may provide greater flexibility and coverage.
How does switching to a new insurer with a claims-made policy work?
When switching to a new insurer with a claims-made policy, the insured should ensure continuous coverage by purchasing tail coverage or an extended reporting period. Pros include lower initial premiums, while cons have fixed coverage limits and potential coverage gaps. Best practices involve carefully reviewing policy language and timing the switch to minimize gaps.
Is it possible to purchase additional coverage beyond the set limits of a claims-made policy?
Extended coverage options are available for claims-made policies but are typically limited to tail coverage or an extended reporting period. Occurrence policies offer broader coverage options, including higher policy limits and umbrella policies.
Are any industries or professions particularly well-suited to claims-made insurance policies?
Industries for Claims Made Insurance include healthcare, legal, and technology. Claims-made policies offer advantages such as continuous coverage for prior acts, lower initial premiums, and insurers’ ability to reflect current claims costs in premiums.
In conclusion, claims-made insurance policies offer specific coverage for professionals and organizations engaged in high-risk activities. Unlike occurrence-based approaches, the coverage triggers for claims-made policies require an active policy when filing a claim.
The benefits of this type of policy include lower premiums, flexibility, and the ability to tailor coverage to specific needs. However, claims-made insurance policies also come with potential risks and limitations, such as the need for constant policy renewal, policy exclusions, and potential coverage gaps.
Therefore, it is crucial for individuals and organizations to carefully evaluate their insurance needs and weigh the benefits and drawbacks of claims-made insurance before purchasing a policy.
Working closely with an experienced insurance broker at The Allen Thomas Group helps ensure that the policy meets the insured’s specific needs and provides adequate coverage.
Ultimately, purchasing a claims-made insurance policy should be based on a thorough understanding of its coverage triggers, limitations, and potential risks.