Claims-made insurance policies are designed to provide coverage for covered acts when a claim is made and reported during the policy period. An unendorsed claims-made policy generally only provides coverage for the current policy term for covered acts that occurred during the policy period and where the claim is made and reported during that term. An unendorsed claims-made policy provides no further coverage once the coverage has lapsed. This can be a big problem if the covered error is discovered and then reported after the policy expires. There are 2 options to resolve this issue:
1. Purchase an Extended Reporting Period Endorsement (ERP or Tail) at the end of each policy term. Cumbersome and potentially expensive, at least in the short run.
2. Have subsequent claims-made insurance policies endorsed with a prior acts or retroactive date that provides coverage for acts that occurred prior to the current policy period.
By convention, the generally accepted method of extending claims-made coverage beyond the current policy year is through the use of a prior acts or retroactive date.
During the 1st year of claims-made coverage the policy is issued with a prior acts date that equals the inception date of coverage. With a policy that the Prior Acts Date equals the Policy Effective Date there is no coverage for any acts that occurred prior to the effective date of the current policy even if reported during the policy period. This 1st claims-made policy is sometimes referred to as a retro date inception (RDI) policy.
At subsequent anniversary dates, the renewal policy needs to maintain the prior acts date that was established at the inception date of coverage. If this date is advanced than the insurance coverage is open to covered acts that are potentially now uninsured. It is very important to maintain your Prior Acts Date once established to prevent coverage gaps. Unfortunately, either through carelessness or deliberately, to lower the price we continue to see competitive renewal offerings where the prior acts date has been shorted. In the most extreme cases, the coverage offered is another RDI policy that wipes out coverage for all past acts. An RDI policy is significantly cheaper than a “fully rated policy” with prior acts coverage because it offers no protection for past acts coverage.
If coverage is shorted, once put in place and the error is not discovered almost immediately, it is very difficult and expensive to get prior acts coverage back.
One way to prevent having your prior acts date changed is to work with a trusted agency that is familiar with claims-made insurance coverage. Most insurance agencies rarely work with claims-made insurance coverage. While they might be an expert in homeowners and a good golfer, they may not be the best choice to properly write a claims-made insurance policy.
L Squared Insurance Agency LLC specializes in professional liability claims-made insurance policies. If you have a question about claims-made coverage let us know. We will be happy to help you.
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Lee Norcross, MBA, CPCU Managing Director, CEO (616) 940-1101 Ext. 7080 |
