How to Avoid Uncovered Exposure
Almost all professional liability (PL) insurance policies are written on a claims-made basis. It is important to understand the claims-made nature of your PL policy, as it is a fundamental aspect of your insurance coverage.
This type of insurance covers claims that are both first made during the policy period and reported in writing to the insurance carrier during the policy period. Coverage applies for claims made and reported to the insurer while the policy is in force, even if the activity giving rise to the claim occurred before the policy was purchased, as long as the wrongful act did not occur prior to the retroactive date.
Because actual claims often do not arise until long after the alleged activity is committed, most professional liability policies available are offered on a claims-made basis because it helps insurance carriers estimate potential losses and more accurately underwrite the risks involved.
Coverage applies for claims made and reported to the insurer while the policy is in force, even if the activity giving rise to the claim occurred before the policy was purchased.
By way of contrast, most commercial general liability (CGL) insurance policies are written on an occurrence basis. When insurance coverage is written on an occurrence basis, the date of the occurrence is what determines whether there is potential for coverage under the policy. Specifically, the occurrence, typically bodily injury or property damage, must occur during the coverage period for there to be coverage under the policy.
Accordingly, when coverage is written on an occurrence basis, there is a potential for covered claims to surface years after the policy expires. When coverage is written on a claims-made basis, there is little to no potential for covered claims to surface after the policy expires. Professional liability insurance policies are written on a claims-made basis because of the certainty that this type of underwriting affords the insurer. However, the claims-made nature of these insurance policies does create some potential pitfalls for unwary insureds who do not take the time to read and understand the nature of their claims-made policies.
Professional liability insurance policies are written on a claims- made basis because of the certainty that this type of underwriting affords the insurer.
Claims-made coverage may require responsible professionals to keep coverage in force for years after they stop practicing. This will depend on the applicable statutes of limitations and/or repose, as claims may surface years after the alleged act, error, or omission on which they are based. If a claim arises years after the professional services occurred, and the professional has no current PL policy in place, he or she will face uncovered exposure. Most insurance companies offer coverage designed to address this situation, typically referred to as tail coverage.
Claims-made coverage requires professionals to maintain continuous coverage so as not to lose coverage for their prior acts, errors, and omissions. This is due to the fact that PL policies have retroactive dates, or dates after which the act, error, or omission must occur in order for there to be a potential for coverage under the policy. If a professional lets his or her coverage lapse, the retroactive date on his or her new policy will usually be the inception date of the new policy. Thus, the professional will not have coverage for any claim arising from acts, errors, or omissions occurring prior to that date. As explained above, this will lead to the possibility of uncovered exposure due to the lag time between when an act, error, or omission occurs and when a claim is actually made based on the act, error, or omission.
As you can see, it is imperative that today’s professionals understand the fundamental claims- made nature of their PL coverage. Professional engineers with coverage under the ASCE program should not hesitate to discuss this further with their representatives at Pearl Insurance or the professionals available to them through the ASCE hotline.
