The last two weeks in IN&V, we have reviewed the allegations and lessons to be learned from the Washington, D.C. area subway system’s suit against mega-broker Aon risk Services, Inc. After those articles, IN&V received inquiries for more information on the fourth lesson highlighted last week: “Beware of claims-made and reported.” To that we say, “Glad you asked!” As you will see, if the famous pianist-Liberace is “claims-made,” what we have in Lady Gaga is “claims-made and reported.”
The difference between pure claims-made and claims-made and reported follows the same continuum of making loss costs more predictable for insurers. In the 1970s and 1980s when the concept of claims-made was taking off, the reason it caught on was corporations, fiduciaries and all manner of professionals increasingly were convinced they needed more liability coverage. The liability insurance coverage form was widely available at the time; however, it was occurrence-based coverage, and insurers were understandably fearful.
What insurers were seeing was liability would be assessed by the courts on policies issue decades earlier. Insurers never saw this coming. Courts would essentially take policy limits and apply them to losses for all the years from first exposure, add in all the policy limits while the exposure was growing and cap it off with the policy limit in force when losses became known. This came in the form of pollution first, but was followed by asbestos.
Seeing this (and fearing similar long-term consequences but attracted by potential new premium dollars from D&O), fiduciary and other new professional liability insurance underwriters looked for a more predictable way to structure coverage. What they arrived at was limiting coverage to when a claim was discovered (i.e., pure claims-made was born). This went a long way toward eliminating the need to predict events far into the future from activities today and limited underwriters to focus on what will happen next year. Insurers felt better, and after insurers (like your national program insurer Swiss Re/Westport and Fireman’s Fund) paved the way, what we see today is literally hundreds of insurers writing professional liability on a claims-made basis.
Claims-made and reported enters the scene as some insurers looked to make losses even more predictable. Like Lady Gaga’s outfits coming after Liberace’s trademark costumes, one can argue if it’s evolution or de-evolution, but there is no arguing which preceded the other. The distinction came about as insurers where hit with losses from “claims-made,” where insurers were saying to themselves, “Wait a minute, this claim looks like they knew about it two years ago…I never thought we’d get stuck with this…they should have made this claim with the prior insurer.” The result was some insurers moved toward forms that required both that the claim be made against the insured and be reported to the insurer during the policy period.
The problem with the claims-made and reported is neatly stated by one of our Big “I” state association agency E&O experts, David Surles, CPCU, RPLU, AAI, and director of professional liability at the Independent Insurance Agents of Texas:
“Example: The agency receives by mail on the last day of the policy period a written demand for money due to an otherwise covered wrongful act that was committed well within the policy period. That is the date the claim is made—the last day of the policy period. Meanwhile, the policy has already been renewed by the same carrier. If that letter sits on someone’s desk until the next day or over the weekend and isn’t reported to the carrier until after the effective date of the renewal policy (or more than 30 or 60 days into the policy in the case of the “modified claims made and reported” policy), then neither policy will cover the claim. The claim was “made” during the term of the expired policy but it wasn’t reported during the policy period (or extended reporting period), so it’s not covered on that policy. And since the claim was ‘made’ during the prior policy period, it’s not covered on the renewal policy.”
So with that, we hope the distinction between pure claims-made and claims-made and reported policies is clearer. We do not disparage necessarily the claims-made and reported form in all cases as it has its applications just like more limited fire and extended coverage does for certain dwellings. Agents, however, generally have a choice, and when given a choice, you should chose pure claims-made (Liberace) and pass on claims-made and reported (Lady Gaga).
Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage® and a licensed p-c agent.
If you have a specific question on your agency’s E&O coverage, we encourage you to contact your Big “I” state association. Contacts in your state can be found at www.iiaba.net/eo.