5. August 2013 16:17
Any small-business owner who has considered purchasing Professional Liability Insurance (including Errors & Omissions Insurance, Malpractice Insurance, and Directors and Officers Insurance) has likely come across the term “claims-made coverage.”
Unlike many other types of business insurance, most Professional Liability policies work on a claims-made basis. Here’s a look at what that means and how small-business owners can ensure they receive adequate coverage from their policies.
“Claims-Made” Vs. “Claims Made and Reported”
Under the “claims-made” umbrella are two distinct types of insurance coverage: pure “claims-made” and (more commonly) “claims made and reported.” In order to understand the difference between the two, it’s important to understand what constitutes a claim under most Professional Liability policies.
In most cases, a claim is any notification presented to the insured party (your business) of an incident that would be covered by Professional Liability Insurance. For example, if one of your employees emails you saying that she thinks she’s been discriminated against in shift scheduling, that email could constitute a claim—even if she doesn’t initiate an EPLI lawsuit. (For details about what constitutes discrimination in the workplace, check out the Equal Employment Opportunity Commission's discrimination definitions.)
This is different from most business liability insurance policies, for which claims primarily consist of lawsuits brought against the insured party.
Here’s how “claims-made” policies differ from “claims made and reported” policies:
- Pure claims made policies: These cover claims that occurred while the liability policy is in force, but do not require the insured party to report the claim during that period. Often, policies state that insured parties must report the claim “promptly” or as soon as possible.
- Claims made and reported policies: These require the insured party to report claims in the same claims period that they occur. In other words, if a business owner receives an email alleging discrimination, they have to report that email to their insurance provider before the end of their policy term in order to receive coverage, should the incident eventually lead to a lawsuit.
What Is the Extended Reporting Period (ERP) in Claims-Made and Reported Policies?
Most Professional Liability policies come with an optional extended reporting period (ERP, or extended reporting endorsement). Also called a “tail,” the ERP extends the period during which an insured party can report an incident to receive coverage.
- During a private chat, an employee notifies you, the business owner, that she has experienced sexual harassment from a colleague. Even though the employee does not plan to sue at this point, this conversation may count as a claim according to the terms outlined in your EPLI policy.
- You don’t report the conversation right away. You’re busy, and it slips your mind – plus, you thought that you didn’t have to worry until there was actually a lawsuit in motion. When your policy comes up for renewal, you renew it.
- Several months after the initial conversation, your employee initiates a lawsuit about the harassment. You file a claim with your insurance company, even though the claim incident (the initial conversation) occurred during your previous policy period.
- If your policy is “claims made and reported” and you don’t have tail coverage, reporting the claim after the policy’s expiration date could result in claim denial, meaning you’re on your own to pay for the lawsuit. If your policy is a “pure” claims-made, though, reporting “promptly” (even if that means outside the policy’s termination period) would mean you’d probably receive coverage.
How to Receive Coverage from Claims-Made Insurance Policies
Given the stringent reporting criteria that some claims-made (or claims made and reported) Professional Liability Insurance policies outline, small-business owners who carry these policies must be vigilant about adhering to reporting guidelines in order to receive coverage. In practice, that means…
- Reading all Professional Liability Insurance policies carefully. Pay special attention to what constitutes a claims scenario, when insurance providers expect you to report claims, and what might lead to a claim being denied.
- Renewing policies as needed. Claims-made insurance only provides benefits for as long as the policy is active, so business owners should be sure to keep these policies active.
- Choosing the right tail policy. This is particularly important for business owners who choose to change insurance providers or close their business. Tail coverage can ensure benefits for claims that happen in the months following business closure or the end of a policy.
- Communicating with a knowledgeable insurance agent. Business owners can (and should) clarify any points of confusion with their agent to ensure that they receive coverage when they expect to.