Claims-made vs. Occurrence coverages - Part 2

Part 1 of this series examined coverage may or may not apply for a claim filed under a claims-made policy vs. an occurrence policy, based on a question FC&S received regarding a policy for an insured who moved coverage from a claims-made basis to an occurrence form. The claims-made policy had a retroactive date going back to 2002, but in the occurrence policy, the date shown on the declarations was the same date as the policy effective date: April 18, 2022.

Tail coverage

A claims-made policy will include a basic extended reporting period, such as 60 days following the end of the policy expiration. This gives the insured a limited time to report claims that take place during the expiring policy period. The unknown and unreported occurrence will be automatically covered under the expired policy only if the claim is first made within 60 days after the end of the policy period. There is no charge for this basic extended reporting period – also known as tail coverage.

The basic tail and the option to purchase a supplement tail are provided if the policy is canceled or not renewed by either the insured or the insurer. They are also provided if the insurer renews or replaces the policy with one that either has a later retroactive date or applies on an other than claims-made basis.

The basic tail coverage is subject to the policy’s aggregate limits. If those limits are reduced from previous claims, the basic extended reporting period does not reinstate or increase the limits of insurance.

Some claims-made policies contain an Extended Reporting clause and others have an Extended Discovery clause. It is very important to distinguish between them. The Extended Reporting clause provides the insured with the right to purchase an Extended Reporting endorsement upon cancellation of the policy (unless cancellation is for non-payment). This endorsement specifies a period after policy expiration during which claims may be reported.  However, only claims that arise from occurrences while the policy was in force are covered.

The Extended Discovery clause allows the insured to make a written report of their knowledge of an incident or occurrence that took place during a policy term, that may give rise to a claim at a later date. Then, if a claim should materialize after the policy expires or is terminated, the occurrence will be considered as having been made during the policy period.

A claims-made policy has the advantage of having current claims covered by the current policy, so the insured can purchase policy limits that correspond with the current economy and legal environment.

Although the basic tail provides potentially valuable coverage, it does not meet all insured needs in all cases. For example, consider the possibility that a reported occurrence might not result in a claim until five years and one day after policy expiration, or an unreported occurrence might result in a claim 61 days after policy expiration. In either case, the basic tail will provide no coverage. Unless the current policy is a claims-made policy with a retroactive date that goes back to the expired policy, there will be the possibility of uninsured claims unless the insured purchases the supplemental tail for an additional premium, which provides for an extended reporting period of unlimited duration.

The insured must request the supplemental tail in writing within 60 days of the policy’s expiration. If the insured does not exercise its option within the 60 days, the insurer will have no obligation to sell the insured the supplemental tail endorsement. The cost is usually based on a multiple of the premium on the cancelled or expiring policy. The ERP coverage is typically purchased in one-year increments, up to five years, and sometimes longer — but as the tail period grows, the cost goes up, since the insurer is taking on additional risk.

If an insured has a continuous renewal with the same carrier under a claims-made policy, then there is typically no need to purchase the extended reporting period as long as the same carrier is providing the coverage. However, should the insured move coverage to a different carrier, renew the policy on an occurrence form with any carrier, or simply go out of business, then there is the potential for a gap in liability coverage to if an injury occurs during a claims-made policy term, but no claim for damages is presented to the insurer until the occurrence policy is in place.

For example, an insured has claims-made coverage in place for five annual policy terms and renews coverage on an occurrence form the sixth policy term. The claims-made form provides no prior acts coverage and the insured does not purchase an extended reporting period. Six months into the occurrence term, the insurer receives a claim for injury that took place in the third policy term of the claims-made policy. In this case, there will be no coverage provided under any of the policies. Why? Because the occurrence coverage is triggered only if the injury occurs during its policy period, and the claims-made coverage only responds to claims made during the applicable policy period. As such, neither policy’s condition is met and there will be no coverage.

If an insured purchases supplemental extended reporting period coverage, this extends the time period specified by that coverage during which a claim can be submitted to the insurer. The ERP does not extend the policy period, does not change the scope of coverage, nor increase the policy limits. A claim is covered by an extended reporting period only if it results from an injury that occurred before the claims-made policy expired.

Karen L. Sorrell, CPCU  (ksorrell@alm.com) is the associate editor of FC&S Expert Coverage Interpretation, the authority on insurance coverage interpretation and analysis for the P&C industry.

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