As an insured, you have a contractual obligation to report losses or incidents that could generate claims to your insurance carrier. Every insurance policy requires the insured to provide the insurer with timely notice of an occurrence and each policy outlines when and how claims need to be reported. Although the exact policy language may vary, phrases such as “promptly,” “immediately” or “as soon as practicable” are quite typical.
Prompt reporting to the insurer – no matter how small the claim appears – is a requirement of your policy. While some clients may wish to handle claims internally to avoid reporting to their carrier, any delay in reporting can spell disaster. In the event that a lawsuit is filed, and you have not complied with your policy’s provisions, your coverage and defense may be jeopardized.
Report all incidents to protect your rights under your policy. In the case that you feel payment will not be requested, then a claim can always be reported as “notice-only.” By reporting the notice-only loss, you have met the reporting requirements of your policy.
Potential Benefits
In addition to meeting your policy’s conditions, there are many benefits to prompt reporting:
- Allows the carrier to start handling the claim immediately and for a quick determination of liability.
- Preserves the accident scene and necessary evidence, and allows for a thorough investigation while the facts are still fresh.
- Ensures that legal requirements are met and minimizes litigation.
- Early intervention reduces the total cost of claims. The average total claim cost increases an estimated three percent for each day the claim remains unreported.
- Relative to Workers’ Compensation, some states assess fines and penalties to employers for late reporting. Timely reporting of claims prevents these fines and penalties.
- Ensures an early and economical settlement.
Occurrence vs. Claims-Made
An occurrence policy is written to cover claims arising out of incidents that occur during the policy period, regardless of whether the policy is still in effect at the time the claim is made. For example, if you receive a claim in 2012 for an accident that occurred in 2009, the insurance carrier that provided coverage during 2009 must respond, since that is when the occurrence took place. A majority of general liability policies are written as occurrence policies.
On the other hand, claims-made policies are most often associated with professional liability policies, such as Employment Practices Liability, Director and Officers, or Lawyers Professional Liability. Policies on a claims-made basis require you to notify your insurance carrier when you first become aware of any potential loss. Because of the stringent reporting requirements of claims-made policies, not understanding what triggers a claim could result in denial of coverage. Becoming aware of a loss could simply be via an email or verbal notification, even if you do not have a lawsuit in your hands. Failure to notify your insurance carrier of a loss when you first become aware may jeopardize your ability to receive defense and/or indemnification from that policy.
There is however, another caveat to a claims-made policy – the “retroactive date.” The retroactive date should be the date when you first had the coverage, no matter which insurance company provided it. For example, if you have an Employment Practice Liability policy and the first policy was written on January 1, 2004, this date should be carried forward every year that you renew as the “retroactive date.” In the event that you change insurance carriers, and the retroactive date is January 1, 2004, then the policy will respond to any claims reported to you if the loss date is January 1, 2004 or greater. Should you cancel or non-renew a claims-made policy, ask your insurance professional about “Extended Reporting Period” and “Tail Coverage.” This policy feature allows you an extended time for reporting claims that may have happened during your policy period.
Each policy has very specific and strict claim reporting requirements, which are typically found in the “conditions” section of the policy. Please read and comply precisely with these provisions to preserve your coverage.
Occurrence Versus Claims-Made Policies
Lists of Coverage
- Occurrence: Coverage will respond to incidents arising from the coverage period regardless of when claims are reported.
- Claims-Made: Coverage will respond to incidents that occur and are reported while the policy is in force.
Prior Acts or Retroactive Coverage
- Occurrence: No prior acts coverage is available because the policy will only cover incidents occurring while the policy is in force, even if a claim is reported after the policy expires.
- Claims-Made: This additional coverage can be purchased to cover incidents that occurred before the policy’s actual effective date.
Extended Reporting or Tail Coverage
- Occurrence: Extended Reporting coverage is not required because claims that arise from incidents that occurred during the policy period are covered, no matter when they are reported in the future.
- Claims-Made: This additional coverage should be purchased to cover any incidents that occurred during the policy period, but are reported after the policy’s effective date.
Cost
- Occurrence: Occurrence coverage is more expensive because the policy offers broader coverage since Extended Reporting is included.
- Claims-Made: The initial premium and subsequent years’ premium are typically lower than an occurrence policy.