In the domain of insurance, particularly for businesses and professionals, the type of policy chosen can significantly affect coverage and financial protection. One such type is the Claims Made Insurance Policy, which plays a critical role in industries where liability risks are higher (such as legal, medical and financial sectors). This blog will explore what claims-made policies are, how they work and the various nuances of this type of coverage that businesses and professionals need to understand to ensure adequate protection.
What is a Claims Made Insurance Policy?
A Claims-Made Policy is a type of liability insurance policy that provides coverage only if a claim is made during the active policy period. This contrasts with occurrence-based insurance, where coverage is provided if the incident occurred during the policy period, regardless of when the claim is made.
In India, claims-made policies are common in liability insurance policies such as:
- Professional Indemnity Insurance (e.g., for doctors, lawyers, architects, accountants)
- Directors and Officers (D&O) Insurance
- Errors and Omissions (E&O) Insurance
A claims-made policy is particularly useful in sectors where the risk of litigation or claims may emerge months or even years after the services were provided or the incident occurred. However, it requires careful management of claims-made policy periods and retroactive dates to avoid coverage gaps.
How Does a Claims-Made Policy Work?
The fundamental aspect of a claims-made insurance policy is that it responds to claims reported during the policy period. The incident or error that gives rise to the claim may have occurred at any time after the retroactive date of the policy, but it must be reported within the active period of the policy to be covered.
To better understand how a claims-made insurance policy works, consider the following key components:
1. Claims-Made Policy Period
The policy period is the duration for which the claims-made insurance policy is active. For a liability insurance policy, this period is crucial because the insurer will only consider claims that are reported during this timeframe.
For example, if a liability insurance policy runs from 1st January 2023 to 31st December 2023, and a claim is made in July 2023 for an error that occurred in February 2022, the claim will be covered, provided the retroactive date of the policy is before February 2022.
2. Retroactive Date
The retroactive date is one of the most critical terms in a claims-made insurance policy. This is the date from which the liability insurance policy will cover incidents, errors, or omissions that lead to a claim. Any claim arising from incidents before the retroactive date is not covered by the claims-made insurance policy, even if the claim is made during the policy period.
For example, if the retroactive date is 1st January 2020 and a claim is made in June 2023 for an incident that occurred in December 2019, the claim will not be covered because the incident occurred before the retroactive date.
3. Tail Coverage or Extended Reporting Period (ERP)
Since claims-made policies only cover claims made during the active policy period, there is a risk that claims might arise after the liability insurance policy has expired or been cancelled. To protect against this, insurers offer an Extended Reporting Period (ERP), also known as the tail coverage. This allows policyholders to report claims after the claims-made policy period ends, as long as the incident occurred during the policy period or after the retroactive date.
For example, suppose a company has a claims-made policy that expires on 31st December 2023, but a claim arises in February 2024 for an incident that happened in October 2023. The tail coverage would allow the company to report the claim and receive coverage, even though the claims-made policy has expired.
4. Claims-Made and Reported Policies
In India, many claims-made policies are actually “claims-made-and-reported” policies. This means that not only must the claim be made during the claims-made policy period, but it must also be reported to the insurer during the same period. Failure to report the claim within this timeframe can result in the claim being denied, even if the claim itself arose during the claims-made policy period.
For businesses and professionals, this emphasizes the importance of prompt reporting of any potential claims or incidents that could give rise to a claim.
Key Features of Claims Made Policies
Several features differentiate claims-made policies from other types of liability coverage, including occurrence policies:
1. Immediate Coverage for New Risks
Claims-made policies allow businesses to obtain coverage for new risks immediately, as long as those risks fall after the retroactive date. This can be particularly useful for growing companies or professionals who face changing risk profiles over time.
2. Retroactive Protection
Claims-made policies with retroactive dates provide coverage for claims related to incidents that happened before the policy was purchased, as long as they fall within the retroactive period. This can protect professionals who have been in practice for years but only recently obtained liability insurance policy coverage.
3. Extended Reporting Period (ERP) Options
Many insurers offer an ERP or tail coverage, which is valuable when switching insurers, retiring or ceasing business operations. The ERP can be purchased to ensure that claims arising after a liability insurance policy period can still be reported and covered.
4. Policy Limit Considerations
The policy limit in a claims-made policy is generally applicable to claims reported during the policy period. For example, if a business purchases a claims-made insurance policy with a coverage limit of INR 10 lakh for the year, all claims made and reported within that year will be subject to this limit, regardless of when the incidents occurred.
Who Should Consider a Claims-Made Insurance Policy?
A claims-made liability insurance policy is particularly well-suited for professionals and businesses in industries where liability risks may emerge long after the service or product is provided. These include:
1. Medical Professionals
Doctors, surgeons and healthcare providers can face malpractice claims long after a procedure is performed. Claims-made policies help them manage this long-term liability.
2. Legal Professionals
Lawyers and advocates often face legal malpractice claims after their representation in cases has ended. A claims-made liability insurance policy ensures they are covered for claims that arise years after the legal services were provided.
3. Financial Advisors
Accountants, financial consultants, and tax advisors can be held liable for errors or omissions in their advice or service delivery. Given the nature of financial advice, claims may arise long after the advice was initially given.
4. Consultants and Engineers
Architects, engineers, and other professionals offering advisory services are also susceptible to liability risks that may not surface immediately. A claims-made policy provides protection for these latent risks.
Benefits of Claims Made Insurance Policies
1. Customisable Coverage
Businesses can customize these policies to include appropriate retroactive dates and ERP coverage based on their specific needs. This flexibility ensures that both past and future risks are adequately covered in the claim process.
2. Cost Efficiency
Since claims-made policies only cover claims reported during the active period, they tend to be more affordable than occurrence-based policies, particularly for industries with long-tail liability risks. The ability to adjust policy limits, retroactive dates and ERPs further helps in managing costs.
3. Continuous Coverage
As long as the policyholder maintains continuous insurance coverage, claims-made policies provide protection against both current and past risks. Renewing the policy with the same retroactive date ensures that even older incidents remain covered, as long as the claim is made during the policy period.
Final Thoughts
A claims-made policy in India offers tailored liability protection, particularly for professionals and businesses where claims may arise long after the service was provided or the incident occurred. With critical features like the retroactive date, policy period, and extended reporting period, this policy ensures that risks, both past and present, are adequately managed. With careful management, a claims-made policy can be a powerful tool for managing liability risks in India’s complex business and professional landscape.
