Whether a policy pays out will depend on many things, including the period of time it covers.
An insurance policy is typically valid for 12 months – so surely the period of time it covers is obvious? Not so!
Policies can be written on two bases – “claims made” or “claims occurring” (sometimes also “claims arising” or “losses occurring”.
A “claims made” policy will pay out for any valid claim made during the (typically 12mth) policy period, regardless of when the incident or alleged breach of duty actually occurred. This would be typical of a professional indemnity policy – it means all your work is covered as far back as the start date of the policy or the retroactive date, if your policy has one (here’s an explanation of what a retroactive date is). Depending on your retroactive date, this could mean your current “claims made” policy could cover you for claims made during the policy period which arise out of work you have done over many years.
It is important to note that a “claims made” policy can sometimes pay out in relation to claims made after the end of the policy period – but only if your insurer has accepted a valid notification of circumstances during the policy period. This is a really important point to bear in mind, particularly if you are changing insurer. Let’s look at an example to explain how this might work.
A management consultancy is in month 11 of a professional indemnity policy and becomes aware that a client is unhappy with a report they produced recommending the implementation of a new procedure. No claim has yet been made, but it’s not looking good – the consultancy learns from an external source that the new procedure it recommended was not appropriate for its client’s business sector. Although they are still trying to resolve the matter with their client, the consultancy notifies these circumstances to their insurer, OldInsure – no action is required at this time, but the risk of a claim being made in the future is accepted by the insurer.
The consultancy decides to switch insurer to NewInsure from month 1 of the next policy year. As requested during the quotation process, they notify NewInsure of the outstanding issue. This issue will now be specifically excluded by the new policy. That’s not a problem, however, as OldInsure should cover the consultancy for any claim that is made in the future relating to these circumstances as the policy responds to “claims made” after expiry of the policy period where they arise out of a valid notification of circumstances during the policy period.
For more information about when you should notify your insurer of circumstances that risk giving rise to claims in the future, you may wish to read this article.
On the other hand, your policy could be written on a “claims occuring” basis – meaning it will only pay out for claims that arise out of loss or damage that actually happens during the (typically 12-month) policy period.
An example of this is Employers’ Liability insurance. This was in the news a few years ago when it became apparent that some employees who were suffering industrial diseases caused by work (such as those caused by asbestos) were unable to make a claim on their former employer’s “claims occuring” policy because the claims were made so many years after their exposure to asbestos, either the employer or the insurer – and therefore policy records – no longer existed. A new Code of Practice was put into place to resolve this going forward.
Why is this so important? It goes without saying that we should all read our policy documents and understand all the terms within them!
Two insurance products may both be called the same thing – for example, professional indemnity – and both be written on a “claims made” basis, but they may cover different things and operate quite differently. Insurers will have different wordings and approaches to notification clauses and paying claims. It is important to understand the wording used so that, should the worst happen, you will be able to claim on your policy.