During the policy period, the insured became aware of certain events that could potentially become claims for wrongful termination under the policy. However, the mere existence of these circumstances did not technically represent a claim under the policy. The definition of claim required that there be a lawsuit or a demand for damages. Neither of these had yet occurred, and it was uncertain if they ever would occur.

Nevertheless, there was some concern that a claim might be made against the insured in the future. The insured's broker was asked for guidance in deciding whether to attempt to report such information to the insurer. In addition, it was unclear whether sufficient information existed to allow the reporting of even a potential claim. The broker advised the insured that they had 60 days from the expiration of the policy to report a claim or potential claim. Because expiration was still some time off, the insured opted to monitor the situation and make any reports of a claim or potential claim at policy expiration, or sooner if appropriate.

Later during the same policy year, the association announced that the insurer of its sponsored D&O liability program would be replaced with another insurer. The broker managing the association insurance program assured policyholders that the change in insurers would have no impact on the coverage provided and that the change would be “seamless.”

Prior to renewing with the new association insurer, the insured was required to complete an application and to report information regarding claims and potential claims to the new insurer. The application made specific inquiry as to whether the insured was aware of any circumstances or events that might potentially result in a claim. Being aware of the circumstances mentioned above, the insured reported those instances to the new insurer.

Because the new program was described as providing “seamless” continuation of coverage and did not contain a retroactive date limitation, the insured had no reason to suspect a disruption in coverage or to give consideration to purchasing the extended reporting period (ERP) provision.

Uh Oh!

A few months after inception of the new policy, a lawsuit was brought against the insured based on events that had occurred under the expired policy. The prior insurer denied coverage because the claim had occurred and been brought against the insured after the policy expiration and there had been no report of the underlying circumstances as a potential claim under the expired policy.

The new insurer also denied the claim, citing warranty provisions in the application that excluded any claim based on prior circumstances the insured was aware of that might result in a claim.

The insured retained an attorney to assist in the dispute with its primary broker, the association insurance program broker, both insurance companies and the association. Although a lawsuit was avoided, only after much legal gyration was the dispute settled. The insured ended up paying 25 percent of the claim out of its own pocket and the rest being split between the two insurers and two brokers.

The Lessons

This example is extreme, yet it illustrates how fragile the continuity of coverage under claims-made policies can be, especially when changing insurers. Keep the following tips in mind to avoid surprises under your own program or when contemplating changing insurers.

Comply with Reporting Provisions

Claims-made policies place many requirements on insureds. The insured must be alert for and report both claims and potential claims within a specific time period. Insureds should take immediate steps to determine whether claims or potential claims—as those terms are defined by the policy—exist and report them in compliance with the provisions of the policy, usually within sixty days of policy expiration.

In order to preserve coverage under an expiring policy for future claims, consider polling key management personnel when near the end of the policy period to determine the existence or knowledge of instances that might result in a claim and report those instances accordingly. Reporting claims and potential claims under an expiring policy requires that the insured be able to identify and provide specific information. The definition of claim and all provisions regarding the reporting of potential claims should be carefully reviewed and complied with. Too often, insureds ignore or overlook important reporting provisions in the expiring policy and concentrate solely on the renewal issues.

Seek Coverage for Prior Acts

As we have seen, it is crucial that any claims-made policy cover claims that result from acts taking place prior to the policy inception date. Unfortunately, not all policies cover prior acts. Whether you are purchasing coverage for the first time, renewing an existing policy, or changing insurers, insist on prior-acts coverage. Be aware, however, that some insurers give coverage for prior acts but limit coverage to only those acts occurring after a certain specified date. Realize, however, that policies that cover prior acts almost always exclude any known instances or circumstances likely to give rise to a claim.

Understand Warranty Limitations in the Application

Most applications for new or replacement claims-made coverages ask the insured whether it is aware of any instances or circumstances that might give rise to a claim. These provisions also normally act as sweeping exclusions for any claims that arise out of such instances, whether reported or not.

One of the problems with such provisions is that they often are very broad in nature or loosely worded to the point of ambiguity. Because application warranty clauses have been the source of many claim disputes, take extra care to answer them honestly and accurately and to understand the ramifications such clauses have. Seek help from your broker, consultant or legal counsel if you are not absolutely certain what information is required.

Carefully Consider Buying an ERP

When you change carriers, the question of whether or when to purchase the expiring policy's extended reporting period arises. ERPs are provisions that give coverage to claims reported within some specified period after policy expiration, but that are based on circumstances taking place within the policy or retroactive coverage period.

An ERP can be particularly desirable when a policy is canceled and not renewed or when a replacement policy excludes claims based on wrongful acts or occurrences taking place during a prior period. The effect is to provide coverage for some known future period of time against the development of latent claims that otherwise would be excluded by either an expiring or replacement policy.

An ERP normally is written for a limited period of time and usually does not increase the limit of liability of the policy. Although ERPs can be quite expensive, they can provide valuable protection any time a replacement policy excludes or does not offer key coverages provided by the expiring or replaced policy. Also, there may be instances when the insured is unable to trigger the policy because known circumstances do not meet the definition or reporting requirements of a claim or potential claim. The policy may also not be triggered where known circumstances are excluded by warranty provisions of the new policy. Where this occurs, the only source of coverage for resulting claims might be under the provisions of the ERP.

Conclusion

The very nature of claims-made coverage can represent danger for insureds not familiar with the special reporting provisions and other mechanics of coverage. But even seasoned risk managers sometimes overlook the peril that can exist when changing insurers. To avoid the mistakes described in our example, make sure you have a thorough understanding of coverage issues and any reporting requirements or warranty provisions under both the expiring and renewing policies.

When getting advice from your broker, make certain you understand what you are being told. Also, always get the explanation in writing—it's good insurance. But do not rely solely on your broker. Conduct your own due diligence in reading the policy, lest you end up with two insurers, two policies and no coverage.