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III. Probing the Mysteries of "Claims - Made" Policies

August 1, 2002
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By Richard Todd
III. Probing the Mysteries of " Claims-Made " Policies By Richard Todd Over the past 2 to 3 years, some new terminology has started showing up at liability insurance renewal for many long-term care facilities. Terms such as tail, extended reporting periods, claims made, occurrence and retroactive dates represent concepts that have become critical to understand.

Insurance companies use claims-made concepts to be more effective in pricing their products, control their exposures and account for their losses in a timely manner. It is not my intent to explain why they are using this language in liability insurance contracts, but rather to clear up some of the mystique surrounding these concepts.

Claims-made coverage is nothing new. In fact, physicians and hospitals have been familiar with this concept for more than 20 years. In general, long-term care operators have been able to purchase occurrence policies for years but have encountered claims-made language only recently.

So, what's the issue? At its core, the difference between claims-made and occurrence coverage has to do with isolating one key variable in the policy: Which insurance policy pays for the expenses associated with a claim that is made today but stems from an event that took place in years past?

As an example, look at the timeline in Figure 1. An adverse event (E) occurs in 1998. Time goes by and (forgetting statute of limitations issues) a claim (C) is filed in 2002. If you have an occurrence policy in place, then the policy that was in force when the adverse event occurred is the policy that should respond. Thus, in this example, the 1998 policy form, limits, deductible, broker and insurance company should apply.

If a claims-made policy had been in force when the claim was made, then that policy, i.e., the 2002 policy form, limits, deductible, broker and insurance company, should apply. It's a different game
from the "occurence"
policies you're used to-
here's what you
should know.
There is one important qualifier to this: The insurance contract says that the event (E) must have occurred after a preagreed-upon date that we call the retroactive date (often called the 'retro" date). Let's look at Figure 2 for clarification. In this example, the same adverse event (E) took place in 1998, and a claim (C) was filed in 2002. If the retroactive date was R1, then the claim would be covered. If the retroactive date was R2, then the claim would not be covered, since the claim must be made during the policy period and the event must have taken place after the retroactive date.

When a change is made from an occurrence to a claims-made policy, the retroactive date should be set as the inception date of the new insurance contract. In future years, as the claims-made policy is renewed, the retroactive date should remain the same as it was in the first year. If the retroactive date is inadvertently advanced, then a gap in coverage will be created.

Look at Figure 2 again. Assume that the first claims-made policy was purchased on July 1, 1997; that it was renewed each year on July 1; and that we find out that we are being sued on April 1, 2002. If the policy was renewed correctly each year, then our current policy (for July 1, 2001, to 2002) would have a retroactive date of July 1, 1997. Our claim would be covered (assuming all other policy provisions allow for this). The scenario we are concerned about shows up, however, if we find out that somehow, at the renewal on July 1, 2000, for example, the retroactive date was inadvertently advanced to July 1, 2000 (R2). Since the event (E) occurred before the retroactive date (R2), we have no coverage.

It is critical that you do not let a gap in coverage result from accidentally letting your retroactive date change. Remember, you never want to change your retroactive date once you have one. The principal ex-ception to this is discussed later in this article.

An interesting feature of claims-made policies is that the premium for these products will frequently increase each year for a certain number of years until the policy 'matures." You should understand this when you enter into the contract. Claims-made policies are frequently discounted in early years for very good statistical reasons. Consider that, during the first year your policy is in force, the probability of an adverse event occurring and a claim being filed during the same policy year is relatively slim. The second year, the probability of a claim being filed for an adverse event that occurred during that year or the original year is greater. The third year, the probability is even greater, and so on.




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