Claims made vs Occurrence Based Liability Insurance

This review drills down to the very understanding of claims-made & occurrence-based liability insurance, rather than dealing with the cover provided by each liability policy per se. To assist our knowledge, the following liability classes, which are peculiarly impacted, are set out:

• Public & Products Liability (GPL) - some insurers cover Molestation/Sexual Abuse under *GPL
• Professional Indemnity (PI) - some insurers cover Molestation/Sexual Abuse under *PI.
• Directors & Officers Liability (D&O)
• Employment Practices Liability (EPL)
• Management Liability (ML)

*The crucial impact & indeed importance of the variance in cover provided (under claims-made vs occurrence-based) will be seen below.

CLAIMS-MADE LIABILITY

PI (including molestation/sexual abuse under PI), D&O, EPL & ML are all written on a claims-made basis. This means the insured is covered for claims made against them during the current period of insurance, irrespective of the date when the incident happened; (subject to the retroactive date - if not unlimited). There are two important criteria to observe with this:

1. By reason of the nature of claims-made policies, the insured is required to report or notify the insurer of any claim or known circumstance which may lead to a claim, within the current period of insurance;
2. It is the current insurer that will respond to a claim made against the insured, & not the insurer on risk at time of original incident.

OCCURRENCE-BASED LIABILITY

GPL (including molestation/sexual abuse under GPL), is generally always written on an occurrence basis. This means the insured is covered for legal liability to pay compensation to a third party for personal injury or property damage, caused by an occurrence happening during the current period of insurance, in connection with the insured’s business operations or its products or services sold or supplied.

(Occurrence means an event or series of events, including continuous or repeated exposure to substantially the same general conditions, which results in personal injury or property damage neither expected nor intended by the insured).

With occurrence-based policies, it is the original insurer on risk at the time when the incident happened, that will ultimately respond to a claim; irrespective of when the claim is actually lodged; which may be many years of elapsed time since the date of the original incident.

If a claim under an occurrence-based policy is lodged today, the current insurer will refer the insured back to their original insurer (who was on risk when the incident occurred).

What are some of the lessons or pros and cons to be gleaned from the above? Are there advantages / disadvantages with Claims-made vs Occurrence?

DIFFERENCE BETWEEN CLAIMS-MADE AND OCCURRENCE - AND THE EFFECT ON CLAIMS

PI/D&O/EPL are on a claims-made basis, as advised above. This simply means the claim or incident/circumstance which may give rise to a claim, must be notified to the current insurer as soon as the insured is aware of a potential claim BUT importantly, during the current period of insurance.

Equally importantly, the date of loss is the date of notification (of claim made on the insured) not the date of the incident which gave rise to the claim.

Remember all existing/known/ought to have known claims/circumstances are excluded (known circumstance exclusion – see commentary below).

The claim must also accord with the retroactive date (if there is a specified & not unlimited retroactive date), meaning incidents which occurred before that date will not be covered.

It is therefore crucial to have an unlimited retroactive date.

So, claims-made policies are concerned with when the claim/notification is made (ie to the current insurer & during the current period of insurance), irrespective of when the incident occurred.

Whereas with occurrence-based policies, it is the original insurer on risk at time of incident, irrespective of how many years have passed since date of incident that will ultimately respond to a claim, even if lodged ‘today’ (decades after the incident).

For illustration, the author can remember a few years ago, one reinsurer commenting on claims before them from their cedant insurer, for asbestos, dating back to the 1970’s.

Difficulties vs Advantages between the two can be seen from the following:

With occurrence-based policies, the insured could have real dilemmas, given the potential for claims to be brought several years after the policy period has expired; or even decades after (as in the case of our asbestos claims mentioned above) – issues such as the following will have to be dealt with:

• the insurer who provided cover at time of incident must be identified; if still in business or still able to be tracked down;
• the insurer may no longer exist; or their liabilities may not have been bought out, as in the case of a company-acquisition;
• the indemnity limit that was in place at time of original incident may now be inadequate, in terms of today’s monetary values – again as in the case of our asbestos claims (above), where the original limit of liability (dating back to the 70’s, was $100,000 ! Compare this to today’s liability limits of $50m. This all leaves the policyholder potentially exposed to large net compensation payouts.

On the other hand, the good news with occurrence-based policies is that the insured never needs to purchase run-off cover (or continuing insurance protection) – as is the case with claims-made insurance (see below).

Compare this to easier claim lodgements under a claims-made policy:

• the current insurer can be readily identified & accessed (period of insurance is within the current 12 month period);
• current & adequate policy limits (can be $20m for PI/D&O; $50m for GPL).

However, the not-so good news with a claims-made policy is that once the policy has expired, if not renewed, generally no further claim can be made under that policy – for any claim that has not already been reported to the current insurer (Section 54 notwithstanding).

There are huge ramifications here for an insured that has held a claims-made policy ie architects, healthcare professionals & care facilities – either currently practising or even those who have retired/ ceased to practice. Once they terminate their claims-made policy, there is no further cover for new & not-previously reported claims. Once cancelled & not renewed, that is the end of that policy.

To get around this dilemma, they must either maintain continuance of their current claims-made insurance (renew) for however long a period they deem appropriate; or purchase run-off cover (continuing protection) for claims made against them, arising from their past practice.

From the above, similar issues can be seen with molestation/sexual abuse cover, if written on a claims-made basis under a PI policy. An insured couldn’t simply move to an insurer who provides this cover under a GPL policy on an occurrence basis (as there would be no retroactivity ie before inception date). They have one of three choices (depending on terms offered to them):

• renew with their current insurer on the existing claims-made basis;
• move to a new insurer who provides molestation/sexual abuse cover on a similar claims-made basis;
• move to a GPL occurrence-based wording if that insurer provides molestation/sexual abuse cover on a dual claims-made and occurrence-based wording with unlimited retroactive cover (or at least similar to the retroactive date they currently have in place). However this aspect is another story & the subject of another more detailed review.

SOME COMMON TERMS & A PRÉCIS BEHIND EACH ARE SET OUT FOR ASSISTANCE

A known circumstance is a fact, situation or circumstance which:

• the insured knew before their insurance was renewed or effected;
• a reasonable person in the insured’s professional position ought to know before their insurance began, that such fact, situation or circumstance might result in an allegation being made against them (insured) in respect of a liability that might be covered by their policy.

Claims arising after policy inception - which emanate from circumstances the insured knew at inception date may lead to a claim, are excluded. The reason for such exclusion (and non-cover) is that such claims are not fortuitous at the time of entering into the insurance contract, but on the contrary, there is a real possibility that a claim may eventuate.

By notifying all circumstances when they arise during the period of insurance, denial of a future claim in the above situation could be avoided. Notification protects an insured’s rights under their policy to seek indemnity for a future claim. Approximately 25% of declinature for indemnity arises from a failure to notify.

CIRCUMSTANCES: HOW TO RECOGNIZE A PI CIRCUMSTANCE

OBVIOUS TYPES

• letter of demand from client/solicitor foreshadowing potential litigation
• phone call from client/solicitor alleging failure of professional services
• abusive/angry customer demanding return of fees paid
• persistent complaints, either in writing or verbally, over a period of time about the standard/quality of the professional service provided
• major problem/mishap occurs with service/advice given & insured can foresee potential financial loss for the client

LESS OBVIOUS TYPES

• client makes a negative comment in passing about the adequacy of the professional services provided
• insured hears from other source, about a client’s strong dissatisfaction with the service provided
• a client’s continued failure to pay the insured’s account arouses suspicions of dissatisfaction of the service provided
• media reports a claim against an insured’s client for work/service completed by the insured – potential for a cross claim against the insured
• insured discovers that the professional advice was incorrect & can foresee client suffering an economic loss

COMMON QUESTIONS – CLAIMS-MADE POLICIES

HOW DOES A RETROACTIVE DATE INTERACT WITH THE DATE OF INCEPTION?

The retroactive date is the date after which any act, error or omission of the insured is covered. That is any act, error or omission arising from advice given or treatment provided, after the retroactive date and before the policy inception date, will be covered under a PI policy. The inception date is the date of the start of the period of insurance.

WHAT IS CONTINUOUS COVER UNDER A PI POLICY?

This means if someone who was insured in unbroken successive periods notifies their insurer of a claim/circumstance in the subsequent period which should have been notified in the earlier period, then that claim will be covered under the latter policy but subject to the lesser limit of the two applicable policies. Issues of non-disclosure and the known circumstances exclusion will not be raised; however prejudice due to delayed notification may be taken into account in adjustment of a claim.

DIFFERENCES IN LIMITS BETWEEN EACH OF THE POLICY TYPES UNDER REVIEW

• Public Liability: Policy limit $50M each & every occurrence/claim (allows unlimited $50m claims in the period of insurance, with no annual aggregate limit)
• Products Liability: $50M per claim/all claims in the annual aggregate (that is one total limit for ALL claims in each period of insurance)
• PI & D&O $10M / $20M (Any One Claim / All Claims in the Annual Aggregate

These policies generally provide cover for $10M each claim, limited to a total of $20M for all claims in the annual aggregate period of insurance. However, they also generally provide one automatic reinstatement in each period of insurance; therefore the above limits are effectively doubled, for each period of insurance.