Most professional liability policies are written on a “claims made and reported basis,” requiring claims to be made and reported during the applicable policy period.
Simple right? Not so fast. Insureds need to remember several extremely important components that must be satisfied to ensure coverage.
First, the obvious. Claims must be made against the insured during the policy period, which typically runs for one year. For example, if the policy period is listed from January 2, 2016 to January 2, 2017, a claim would need to be made during those effective dates. If the claim was made prior to January 2, 2016, for instance on January 1, 2016, it quite simply would not be covered under the policy. Similarly, if a claim is made after the policy period, for instance January 3, 2017, it also would not be covered because the claim would fall outside the policy period.
Second, all claims must be reported to the professional liability insurance carrier within the same policy period in which it is made, subject to specific exceptions. Using the example above, if a claim is reported to the carrier on January 3, 2017 (after the policy’s expiration date of January 2, 2017), the claim would not be covered due to late reporting.
However, most policies offer the ability to report claims during an extended reporting period, which can either be automatic or sometimes purchased depending on the carrier. The automatic extended reporting period of most policies is 30 to 60 days. Others may provide a generous 120-day automatic extended reporting period. Although the claim still needs to be made against the insured during the policy period, the extension allows the insured extra time to report a claim to the carrier after the policy has expired.
Reporting of circumstances
Another policy enhancement included within most professional liability policies is the reporting of circumstances. A notice of circumstance is when insureds report to their carriers, during the policy period, a situation or event that they reasonably believe may result in a claim. There is usually a list of requirements that need to be met in order for the matter to qualify as a circumstance under a policy.
This list may include:
- When and how the insured first became aware of the circumstance.
- The reasons for anticipating such a claim.
- The nature and dates of the alleged circumstance.
- Any alleged injuries or damages sustained from the circumstance.
- The names of potential claimants, if available.
If a circumstance is properly reported during the policy period and accepted by the carrier, then any claim subsequently made in relation to the circumstance will be listed as the date the carrier originally received notice, provided the issues and concerns relate back to the original notice of circumstance.
So, hypothetically, an insured could report a notice of circumstance to the carrier and then three years later, if the claim was made regarding the same incident that was previously reported and directly related to the original notice of circumstance, it would be covered under that prior policy. But, it must be noted that most professional liability policies require the notice of circumstance to be reported during the policy period only; circumstances generally cannot be reported within the extended reporting period for claims.
Furthermore, claims made and reported policies also often have retroactive dates, which only provide coverage for services the insured performed on or after a certain date. Generally speaking, the retroactive date is the first date the insured purchased professional liability insurance and kept it continually, regardless of the carrier. If an insured decides not to purchase professional liability insurance for a year, it would lose all prior retroactive coverage and the new retroactive date would be when he or she next purchased professional liability insurance.
For example, if an insured performed design services in 1991, but the policy has a retroactive date of 2010, there would be no coverage for the insured’s services in 1991, because the insured provided them prior to the retroactive date of 2010. Therefore, any claim that is made with respect to the services provided prior to the retroactive date is not covered.
Additionally, some policies have what is called a knowledge date. In general, for there to be coverage under the policy, the insured (usually a principal, manager or executive of the insured) could not have known or expected their actions would give rise to a claim prior to the knowledge date. For instance, the policy is issued with a knowledge date of January 2, 2016. If the insured had knowledge on October 1, 2015 of a wrongful act or pollution incident that might give rise to a claim, there would be no coverage for that claim.
Today’s policies also offer the opportunity to purchase supplemental insurance providing additional coverage for specific circumstances. For instance, if the insured receives a subpoena related to the rendering of its professional services, there is usually claim prevention coverage that will provide a mechanism for the insurance carrier to hire an attorney and help the insured respond to subpoenas.
Another important distinction is that most claims made and reported policies have eroding liability limits, meaning that claim expenses and indemnity payments made in excess of the applicable deductible will erode the policy’s limits. If the insurance company receives a notice of claim from the insured and retains defense counsel, the attorney’s fees and costs erode the policy limit. Additionally, if there is a settlement, the settlement payment erodes the limit.
For example, the insured has a policy with a $10,000 deductible and a $1,000,000 per claim/$1,000,000 aggregate policy limit of liability. If defense costs are $40,000, the insured will pay the first $10,000 pursuant to its deductible obligation, and the insurer will pay the remaining $30,000.
If the claim settles for $100,000, the insurer will also make the indemnity payment since the insured’s deductible obligation was satisfied by payment of claim expenses. After the matter is resolved and the claim file is closed, the insured will have a policy limit balance of $870,000 ($1,000,000 – $30,000 – $100,000 = $870,000) to respond to any other claims or circumstances (that later become claims) reported during the applicable policy period. Payments for the supplemental coverages do not erode the policy limits.
Details have significance
However, no matter the insurance form, it is imperative for insureds to report claims or notices of circumstances to carriers as soon as possible and fully understand the policy terms. All policies vary among carriers and have differing sections, such as an insuring agreement, which specifies the scope of coverage that the insured has purchased; definitions that define policy terms; exclusions that provide certain limits to coverage; and provisions which further explain the conditions covered within the policy.
Unfortunately, the old saying about “not sweating the small details” just doesn’t apply here. All details have significance when filing a claim and the benefits of knowledge far outweigh the many costly and time-consuming alternatives.
Wayne Marshall is a senior vice president and professional liability claims manager for Berkley Design Professional Underwriters (a W. R. Berkley Company), a provider of commercial property casualty insurance and risk management programs. Walter J. Adams is a vice president and senior claims examiner for Berkley Design Professional Underwriters. For more information please visit www.BerkleyDP.com.