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What is a Claims Made Policy?

Liability Insurance

What is a Claims Made Policy?

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Claims Made Policy is a liability insurance policy form that provides coverage only when the liability insurance policy is active and the claim-triggering event occurs within the policy period. The guide defines a claims made policy, explains retroactive date coverage, distinguishes claims made and reported policies, gives a cyber liability example and lists advantages and disadvantages. It states that if a Claims Made Policy lapses, the policy does not cover claims that occurred during the policy period but are reported after expiry unless coverage is continued through renewal and retroactive date protection. Retroactive Date is the earliest date from which the liability insurance policy covers claims, and incidents before the retroactive date are not covered. Claims Made and Reported policies require both the claim event and notice to the insurer within the policy period. The article explains that most claims-made liability policies such as Directors and Officers Liability Insurance and Cyber Liability Insurance are issued on a claims made form. Advantages include lower cost than occurrence-based policies and coverage for older incidents after the retroactive date if the policy is renewed continuously, while the main disadvantage is the need to renew every year with retroactive date coverage to keep protection active.

What is a Claims Made Policy?

A Claims Made Policy is a type of Liability Insurance Policy which provides Insurance Coverage only when the liability insurance policy is active. A Claims Made Policy will pay out a claim only if the claim triggering event takes place within the Policy Period and the Policy is active.

If the Claims Made Policy lapses, the policy does not provide insurance coverage for claims which occurred even during the Policy Period. So, in order to continue coverage, claims made policies have a Retroactive Date Provision which continues coverage as long as the liability insurance policy is active. Retroactive Date is the earliest date from which your Liability Insurance Policy will cover Insurance Claims arising under the Policy. A Liability Insurance Policy will not provide any Insurance Coverage for Claim Incidents occurring prior to Retroactive Date. When a policyholder needs extra time to report claims after expiry, the Extended Reporting Period in Insurance becomes the relevant tail-cover concept.

Another version of Claims Made Policy is the Claims Made and Reported Policy. Here, the claim event should take place and notified to the Insurance Company within the Policy Period.

Today, most claims-made liability insurance policies like Directors and Officers Liability Insurance Policy, Cyber Liability Insurance Policy are issued on a Claims Made Form.

Example of a Claims Made Liability Insurance Policy

Consider an example where a Company has a Cyber Liability Insurance Policy with a Policy Period of 1st Jan 2019 to 31 December 2019. The company suffers a Cyberattack on 1st March 2019 and an Insurance Claim was reported on 10th March 2019. This means that the Incident happened within the Policy Period and the Notification of the claim also happened within the Policy Period. This is a Covered Claim under the Cyber Liability Insurance Policy. 

However, if the claim was reported 1 year later on 10 March 2020, the claim would be covered only if the company had continued its Cyber Insurance Policy Coverage by renewing its Policy and if the Company had opted for a Retroactive Date Cover.

This, it is very important for Claims Made Policy form to keep their retroactive date coverage as liability claims can be reported even years after the claim event took place.

What are the advantages and disadvantages of Claims Made Policy?

Advantages of Claims Made Policy

A Claims Made insurance policy contract offers the following advantages:

  1. A Claims Made Policy is usually more affordable than an Occurrence Based Policy
  2. Claims Made Policy provide coverage for claims which happened several years ago as long as the Insurance Broker has renewed the Policy with Retroactive Date. So any claims occurring after the Retroactive Date but reported even after expiry of policy will be covered under a Claims Made Policy.

Disdvantages of Claims Made Policy

A big disadvantage of a Claims Made Policy is that it is necessary to keep renewing the Insurance Policy with the Retroactive Date every year in order to keep the Insurance Coverage Active. If the Policy expires and is not renewed with a Retroactive Date, then any claim event which happens in the Policy Period but is reported after the Policy Expiration Date will not be covered under the Policy.

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Rekha Ramakrishana

Rekha Ramakrishana

Full-time Associate Editorial Director for QIAN, covering financial products and services. She has more than two decades of journalism experience, including 10 years of educating consumers about personal finance.

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