Insurance is straightforward: Policyholder pays Insurer in exchange for a promise to pay losses. Ok, so it’s not that simplistic – and almost never straightforward for that matter – but every claim starts with a notification, usually immediately after an incident occurs.
But what if the notification is only made years after the incident occurred?
Well, conventional Liability Insurance is provided on a ‘Claims Occurring’ basis whereby the policy in place at time of the incident should respond and deal with the consequent claim. A common example might be a claim for noise induced hearing loss brought by an individual many years down the track for their period of employment in a factory.
In comparison, ‘Claims Made’ basis insurance policies only respond to notifications that are made during the policy period itself. This is crucial – it means the Policyholder must report any claims or incidents to the Insurer while the policy is still in effect for them to be covered. Once the policy expires or is cancelled, any claims made after that point may not be covered.
This difference is both important and unhelpfully confusing. With claims for damage or injury, it’s relatively easy to establish who the Insurer was at time of the incident. The same cannot be said for claims involving financial losses, however. The rationale is professional mistakes have a much longer incubation period and often gradually manifest, as opposed to occurring on a set date. This is one of a number of reasons why Professional Indemnity Insurance is provided on a “Claims Made” basis.
Historically, this has only ever been a cross to bear for Policyholders providing advice, design and/or consultancy (Architects, Solicitors, Accountants) however in the modern business landscape there’s an increasing trend in non-traditional sectors (construction, engineering etc.) taking out Professional Indemnity or Directors & Officers Insurance, be it a contractual or existential requirement.
This is a calling to said parties: talk to your broker before cancelling these policies! The ramifications of doing so might be critical if a notification were to come in at a later date; this brings us onto something called “Run-Off” cover which will feature in a follow up blog.
By Simon Wright ACII – Account Executive & Chartered Insurance Broker