Claims-made policies: Overview, definition, and example

What are claims-made policies?

Claims-made policies are a type of insurance policy that provides coverage for claims made during the policy period, regardless of when the incident or event that led to the claim actually occurred. Unlike occurrence-based policies, which cover events that happen during the policy period regardless of when the claim is filed, claims-made policies only cover claims that are reported while the policy is active. This means that if a claim arises from an incident that occurred before the policy was in place, or after the policy has expired, it will not be covered unless extended coverage options are added.

For example, a professional liability insurance policy for a consultant may be a claims-made policy, which means that any claims against the consultant for services provided during the policy period would be covered, as long as the claim is filed while the policy is active.

Why are claims-made policies important?

Claims-made policies are important because they provide businesses and individuals with coverage for claims reported during the policy period, offering protection from lawsuits or other claims related to their operations. These policies are especially useful in professions or industries where claims may arise long after services are rendered, such as healthcare, law, or consulting. The primary benefit of a claims-made policy is that it ensures coverage for claims that are made during the policy period, but the limitation of only covering claims made within the policy period should be carefully considered.

For businesses and professionals, claims-made policies often offer more affordable premiums compared to occurrence-based policies, making them a cost-effective choice for those who want to limit their exposure to claims during the policy term. However, businesses should ensure they have proper tail coverage (or "extended reporting period") if they plan to cancel or let the policy expire.

Understanding claims-made policies through an example

Let’s say a software developer has a claims-made professional liability insurance policy. If a client files a claim for faulty software after the policy has ended, the developer’s insurance will not cover the claim, even if the issue happened during the policy period. However, if the client files the claim while the policy is still active, the insurance will provide coverage, regardless of when the software was developed.

In another example, a physician may have a claims-made malpractice insurance policy. If a patient sues the physician for an incident that occurred within the policy period, and the lawsuit is filed during that period, the physician’s insurance will cover the claim. However, if the lawsuit is filed after the policy ends, the claim will not be covered unless the physician purchases tail coverage to extend the reporting period.

An example of a claims-made policy clause

Here’s how a clause related to claims-made policies might appear in an insurance agreement:

Conclusion

Claims-made policies are insurance policies that cover claims made during the policy period, regardless of when the incident or event occurred. These policies are particularly useful in industries where claims may arise long after the service or event takes place, such as in professional liability or medical malpractice insurance. While they often offer more affordable premiums, it’s important to understand that coverage is limited to claims reported while the policy is active. Businesses and professionals using claims-made policies should consider options like tail coverage if they need protection beyond the policy’s expiration.

Frequently asked questions (FAQs)