What Is Claims-Made Liability Coverage?
Claims-made liability coverage may sound complicated at first, but it’s actually a pretty straightforward concept. We’ll break it down for you, and while we're at it, we'll explain occurrence coverage and tail coverage, too.
In most cases, Errors & Omissions Insurance (also called Professional Liability Insurance) is written on a claims-made basis.
Claims-Made Insurance Policies
So here’s the deal: if you have a claims-made policy, it means that in order for your claim to be covered, both the triggering incident and the resulting claim need to occur while your policy is in force.
For example, let’s say you have a Professional Liability Insurance policy that starts on January 1, 2016, and expires on December 31, 2016. Your policy can cover incidents that occur in 2016 as long as you also file your claim in 2016.
Worth noting: Sometimes a claims-made policy will include a retroactive date that will pre-date the actual start of the policy. In those cases, that retroactive date is the earliest point in time that an incident could have occurred and still be covered by your policy.
So if your policy has a retroactive date of November 1, 2015, you can also file a claim in 2016 for incidents that occurred between November 1 and December 31, 2015. Make sense?
Claims-Made Coverage in Action
First, let’s take a look at a few scenarios that might lead you to file a claim on your Professional Liability Insurance policy. For the purpose of this example, let's stick with the policy start date of January 1, 2016 and end date of December 31, 2016.
Scenario #1: You started working on a major website project due for a client in June 2016, but when your best web developer quits to go work at the startup across town that offers 12 weeks of paid maternity / paternity leave, you fall behind schedule. You deliver the project two weeks past the agreed-upon deadline. Your client files a complaint on August 25, 2016. You file a claim on September 1, 2016.
Is it covered? Yes. Both the incident and the claim occurred in 2016 during the coverage period, so your claims-made policy can cover the claim. (Note: when we say “yes,” we’re assuming the type of claim is covered by your policy. These examples are to illustrate claims-made timelines only.)
Scenario #2: A former client notifies you on January 4, 2016, that a developer claims the software you created for your client infringed on their intellectual property. The developer is now suing your former client, and on January 21, 2016, they both sue you. You delivered the finished software to your client on November 12, 2015.
Is it covered? No. Even though you filed your claim during the coverage period, the incident took place before your coverage was effective, so it won’t be covered.
But let's say you have a retroactive date of November 1, 2015. In that case, both the incident and the claim would have happened during your coverage period (November 1, 2015, to December 31, 2016), meaning your claim would be covered.
Scenario #3: It’s December 23, 2016, and you are at a client’s office installing a firewall on their computer system. You have a Christmas party to get ready for, so you rush through the job a little. On January 3, 2017, you get a call from your client saying you didn’t install it properly and they were hacked. They sue you on January 24, 2017, and you file a claim on January 27, 2017.
Is it covered? That depends. If you renewed that same policy before its expiration date, then yes, your policy can cover it.
If you canceled your policy at the end of the year, the claim won't be covered. Remember, both the triggering incident and the claim must happen while your policy is active in order for you to receive benefits.
Unlike claims-made policies, occurrence policies aren't particular about when the claim is filed. As long as the event that triggers the claim takes place during the occurrence policy's coverage period, it usually doesn’t matter when you actually make the claim.
So say you cancel your General Liability Insurance policy at the end of 2016, but you get sued in 2017 over a slip-and-fall accident. As long as the accident happened when your policy was active, you can typically file the claim and still get coverage.
Coverage Gaps and Tail Coverage
If you decide to switch from one insurance carrier to another, it’s very important that you have continuous coverage with no gaps between policies, especially when you have claims-made insurance policies. Otherwise, any incidents or claims that occur during that gap may not be covered.
If you ever decide to close your business, you will be vulnerable to lawsuits once your business (and claims-made coverage) ends. To address this gap, you can add an extended reporting period (ERP) endorsement, also known as tail coverage. If you are sued by a client over a project you worked on two years before you closed your business, you can be covered – as long as you had liability insurance in place when the incident occurred.
For more on how claims-made coverage works, read our article “What Is Claims-Made Insurance?” If you have a policy with TechInsurance but aren’t sure if you have a claims-made or occurrence policy, contact one of our agents to walk you through it.