COMMUNITIES: PRIVATE PRACTICE
For The Client: What You Should Know About Claims-Made Insurance Policies
BY RICHARD M. MANDEL AND ELIZABETH H. ROHAN
Professional liability insurance for architects, engineers, and environmental consultants is made on a "claims-made" basis, not on an "occurrence" basis. The difference between the two types of policies is significant and is something that every owner should understand and discuss with their risk manager.
PLI provides coverage for claims made against design professionals for their negligent acts, errors, and omissions in providing professional services. The definition of "claim" varies from policy to policy; however, a fairly typical definition is "a written or verbal demand for money or services received by the insured, including service of suit, or the institution of arbitration proceedings against the insured."
Under a claims-made policy, the availability of policy coverage is determined by the date a claim is made against the insured, not when the negligent act occurred or when the damage was caused. In addition, the acts or omissions that are the basis of the claim must have occurred after the "retroactive date" stated in the policy. The retroactive date is negotiable when purchasing PLI to some extent but is usually established as the date from which the design professional has had continuous PLI coverage.
Another important consideration in understanding claims-made policies is that they have an aggregate limit during the policy period—usually one year—in which the claim is made. All indemnity payments (payments made to compensate the claimant), as well as the insured's legal costs to defend against claims, typically erode the total annual aggregate policy limit on a first-come basis. Including defense costs within the policy limits is unique to claims-made policies. Therefore, if there are known to be multiple claims on a single policy, or even if there is only a single claim, the claimant(s) may be well served by a speedy resolution of the claim(s) prior to the insurance limits being eroded by defense costs or multiple claims.
By contrast, an "occurrence" policy—most commonly a general liability policy or an automobile insurance policy—covers all claims under the policy that was in place at the time of the event that caused the damages or injury. This could be years in the past, and it doesn't matter that you may have cancelled the policy or changed insurance carriers. With occurrence-based policies, the insurance never lapses unless the carrier goes out of business. Of course, if the policy is very old, it might have inadequate limits, or limits may have already been eroded by prior claims.
While an occurrence-based policy never lapses, a claims-made policy lapses at the end of the policy period unless it is renewed or the insured purchases an extended reporting period, which is rare because of the costs involved. Thus a claims-made policy presents troublesome issues when the insured allows his policy to lapse and does not maintain continuous coverage. The same issues arise when the insured's business ceases to exist because of dissolution, retirement, or death. In this situation the insured can purchase "tail coverage," which provides coverage indefinitely or for a defined number of years for claims made after the policy period for conduct that took place prior to the insured's business ceasing operations and during the last policy period. The premium for tail coverage is traditionally high and the availability is not guaranteed. It is therefore important to retain well-managed and financially responsible professionals because they will be the most likely to purchase tail coverage to protect their business, personal, or estate assets from claims made by former clients and owners.
The policy limits on an occurrence-based policy are usually established on a per-claim limit with a higher aggregate limit, typically two to three times the claim limit. On occurrence-based policies, the insured's defense costs are almost always outside the limits, meaning the policy limits are entirely available for indemnity or damage payments.
In addition, excess insurance is available to increase the coverage for general liability and automobile insurance (occurrence-based policies) for a relatively small premium.This provides a level of confidence that coverage will be available even if there are multiple claims under a particular policy. On the other hand, excess coverage is typically not available for PLI.
As an owner, you cannot select the type of policy (claims-made versus occurrence-based) because the type of policy available in the marketplace is dictated by the insurance industry. Understanding the differences and limitations of each type of policy, however, can help you make informed decisions about coverage limits that provide a reasonable level of protection for the particular risk at issue.
Richard M. Mandel is a partner and Elizabeth H. Rohan is of counsel with O'Brien, Liotta & Mandel LLP, (www.olmlaw.net) in Union, New Jersey. Combined, they have 50 years experience practicing in the fields of professional liability defense, construction law, environmental law, and insurance coverage and defense.