Your organization purchases insurance policies for Directors & Officers Liability, Public Officials Liability and/or Cyber Liability. These fall into the category of “Professional Liability” policies and with few exceptions, are available only on a claims-made basis. Maybe you are asking yourself, “What is claims-made insurance and how do I go about getting coverage when a claim is made against the organization?” The policy provides no benefit unless coverage is properly activated or switched to the “on” position. By no means does this article express or imply coverage of any claim. But never fear no secret decoder ring is required.

The following is certainly not a text book definition of claims-made insurance. But it seems to resonate with folks. Claims-made insurance provides a window of time for a policyholder to report to the insurance company claims arising from wrongful acts which are first made against the insured while the policy is in effect. Picture your current claims-made policy as an open window. Picture the past claims-made policies as a series of closed windows. While in effect, the window is open for you to report claims in accordance with claim reporting provisions in the policy. When it expires or if you didn’t report in accordance with the claim reporting provisions, the window is closed.

A claim is generally considered “made” when the insured becomes aware of a “claim” resulting from a “wrongful act” as defined by the policy. Claim is typically considered “reported” when the insured reports it to the insurance company. Clear your mind of anything you might think “claim” and “wrongful act” mean. Where the insurance is concerned only the policy definition matters. With few exceptions, many policies require a claim be reported as soon as practical and by no means after the policy expires.

Now you’re thinking why in the world would the insurance industry use this type of arrangement? After all, a property or auto policy only covers claims which occur during the policy period. This is because damages are typically immediate, tangible, and can easily be pinpointed to an occurrence such as a fire or accident on a date certain. Issues affecting decisions or actions of “professionals” are not so tangible, immediate or date certain. With claims against “professionals” it is typical for lag time between an alleged wrongful act(s), the resulting alleged injury, and the claim asserted against the policyholder. The wrongful act(s) leading to the claim often are alleged to have been committed in the past and not necessarily during the current policy year. An example might be alleged unlawful discrimination practices (employment or otherwise) taking place over a period of time, possibly transcending past and present insurance policies. Establishing any single action along the time line as the cause of an alleged injury may not be easy. The subsequent lag time between the alleged bad conduct and resulting alleged injury make it difficult for insurance companies to arrive at when a claim will ultimately be made and reported. At some point in time a smart insurance person decided there had to be a better way to insure a “professional”. This better mousetrap is known as claims-made insurance and it is intended to provide the insurance industry with greater actuarial certainty there would be no further claim activity after a policy expires. Decoded, this means an insurance carrier wants to know with high degree of confidence there will be no more claims on an expired policy. The solution was the development of claims-made insurance.

To enjoy protections provided by the policy purchased, it is important to be fully aware that insurance is nothing more than a contract between the issuing company and the insured organization. Generally speaking an insurance policy is a ‘contract of adhesion’. Simply put this means one party drafts the contract and the other party accepts it with little negotiation as to language, contents, etc. Within the contract both parties have obligations. Examples of duties include but are not limited to the insurance company having a duty to defend the insured organization and to pay on its behalf damages related to claims for which the particular insurance policy applies. In turn the insured organization has a duty to pay the premium and report claims pursuant to policy provisions. With the term “adhesion” in mind, know your duties in the contract and stick to them. Doing otherwise can void potential benefits contained in the policy.

If you’ve read this far, the reward is knowing that cracking the code of coverage activation with claims-made insurance requires knowledge of the types of “wrongful acts” for which the insurance applies, familiarity with the definition of “claim”, and reporting claims first made against you during the policy period in accordance with the claim reporting provisions in the policy.
Shawn Llewellyn is Vice President of the P&G Brokers Division of Professional Governmental Underwriters, Inc. The organization is a leader in providing professional liability insurance products to housing authorities, redevelopment authorities, housing development corporations, and the like on a countrywide basis.