Definition of claims-made liability insurance coverage
Insurance policies are claims-made policies or occurrence policies.
Claims-made policies require the claim to be made against the insured and reported to the insurer during the policy period. Occurrence policies require the claim occurrence to be during the policy period but have no limit on when the claim has to be presented to the policy. Certain coverages, such as professional liability, are generally written as claims-made policies whereas standard general liability policies can be claims-made or occurrence.
Statute of Limitations
Each state sets a certain time limitation known as the statute of limitations on when types of claims made be made against another party. Once the statute of limitations has expired, no new claims may be presented. For example, if the statute of limitations on bodily injury claims from automobile accidents is one year, the injured party must resolve its claim within one year of the date of accident or the claim is barred.
A claims-made policy requires that all claims to be considered for coverage must be made against the insured and reported to the insurer during the policy period. Because the statute of limitations provides for an extended time period in which to present claims, insureds who do not renew their policies will not have coverage for losses that occur during the policy period but are not reported until after the expiration of the policy.
The second date limitation on a claims-made policy is known as the retroactive date which is a prior period wherein the claim may have occurred but is only now being presented to the policy. Due to extended statute of limitations on certain claims extending many years, claims can be made against another party decades after the initial incident. To eliminate coverage for these prior losses, claims that occurred before the stated retroactive date are not covered even if they only became known during the policy period.
Extended Reporting Period
If an insured is winding down a project or business previously insured by a claims-made policy, it may procure an extended reporting period on its last claims-made policy instead of renewing it each year. The extended reporting period allows the insured to present claims that occurred during the period of operations but are not reported until after the expiration of the claims-made policy.
Occurrence policies are different from claims-made policies in that they only require the incident giving rise to the claim occur during the policy period. With an extended statute of limitations allowing claims to be presented many years after the incident, occurrence policies maintain their coverage value for insureds many years into the future even after the policy expiration date.