E&O Tip – The Need to Educate the Customer When Moving Them From a Claims-Made to an Occurrence Form

While it may not happen often, from time to time, you may look to move your account from a claims made form to an occurrence form. There are some key issues for agents to be aware of that if not handled properly could definitely spell trouble for your customer and ultimately for your agency.

 
With a claims-made form, the policy in effect when the claim is brought is responsible for responding to the claim. Claims-made policies either contain a retro date or provide full prior acts coverage. For coverage to apply if the policy contains a retro date, the injury/error or omission, etc. must occur after the retro date. Thus, with a claims-made policy, the trigger is when the claim is made, not when the injury/error or omission occurred.
 
With an occurrence form, the policy in effect when the injury or damage occurs will respond to the claim. Provided the injury or damage occurred during the policy period, an occurrence form will respond regardless of when the claim was brought, subject to any applicable statute of limitations. 
 
There is tremendous potential for a gap in liability coverage to occur when the insured’s policy coverage goes from a claims-made to an occurrence form. Let’s assume policy dates of 2011 for the claims-made policy and 2012 for the occurrence form. A common scenario is where the injury occurs during the claims-made policy period (2011), but the claim for the damages is made during the occurrence policy period (2012).
 
In this case, neither policy provides coverage since the occurrence form only pays if the injury occurs during the occurrence form’s policy period. The injury/error or omission occurred in 2011, before the occurrence form went into effect. Because a claims-made form only responds to claims made during the policy period, neither policy’s condition is met. The injury/error or omission occurred before the occurrence form existed – and the claim came after the claims-made form expired. This has the potential for your customer to have an uncovered loss.
 
The suggested course of action to avoid a gap in coverage when an account is moved from a claims-made form to an occurrence form is for the insured to purchase an Extended Reporting Period, a/k/a as a “tail”, under his claims made policy. It is critical that customers/agents realize this tail option must be exercised within a set time period (typically 60 days). Essentially, the tail provides an additional time period to report a claim for any injury/error or omission that occurred during the claims-made policy period and after any applicable retro date.
 
Moving an account from “claims-made” to “occurrence” or vice versa is a serious issue. It is extremely important for the agent to provide full and open disclosure to the customer to make sure that they are aware of any potential issues involving the two forms with all discussions well documented not only in the agency system but also with written communication back to the customer.
 

 

 

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