Many liability insurance policies are now issued on claims-made policy forms. As a business owner, risk manager or insurance broker, it is important to understand the difference between occurrence-based and claims-made forms and the key insurance coverage issues that arise in connection with claims made insurance. This presentation addresses these important topics.

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www.mcguirewoods.com
Avoiding the Minefields of
Claims-Made Coverage
Risk and Insurance Management Society, Inc.
Carolinas Chapter
17 November 2016
L. D. Simmons, II
McGuireWoods LLP
lsimmons@mcguirewoods.com
704.343.2062

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Introduction
• What is claims-made coverage?
• History of the claims-made form
• Key coverage issues arising from claims-made forms
• Best practices in purchasing claims-made policies

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Claims-Made vs. Occurrence Coverage
• Occurrence-based coverage:
– Common in commercial general liability policies
– Insures bodily injury or property damage that takes place
during the policy period regardless when the claim is made
• Claims-made coverage
– Common in D&O, professional liability and specialty policies
– Provides coverage if the claim is made against the insured
during the policy period, regardless when the injury took place

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Key Differences Between Occurrence and
Claims-Made Policies
• The claim, not the injury, is the threshold event
– The policy in effect at the time of the claim provides
coverage
• A wrongful act triggers coverage, not bodily injury or
property damage
• Reporting is an element of coverage, not a policy condition
• If notice is late, the insurance company does not have to
prove prejudice

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History of Claims-Made Coverage
• Arose in the professional liability arena
• Why?: The time lag between the error and the claim
– Professionals are rarely aware of errors when they occur

6. • Joe DeAllesandro at AIG found a better way − provide
coverage based on the date of the claim, not the date of the
injury
• The result was two branches of claims-made insurance:
• Expanded significantly in 1980s

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CONFIDENTIAL
Coverages Provided on Claims-Made Forms
1. Directors and Officers
2. Medical Professional Liability
3. Legal Professional Liability
4. Employment Practices Liability
5. Brokers Errors and Omissions
6. Media Liability
7. Cyber Liability
8. Technology Errors and Omissions
9. Certain Types of Product Liability
10. Fiduciary Liability

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Two Types of Claims-Made Policies
• Pure claims-made policies – require only that the claim first
be made against the insured during the policy period
• Claims-made and reported policies – require that the claim
first be made against the insured during the policy period
and reported to the insurer during the policy period or an
extended reporting period.

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Claims-Made and Reported Policy
Sample Policy Language:
This is a claims-made and reported policy …. This policy has certain
provisions and requirements unique to it and may be different from
other policies an “insured” may have purchased …. “Claims” must be
first made against the “insured” during the “policy period” and
“claims” must be reported, in writing, to us during the “policy
period”, the automatic extended reporting period or the extended
reporting period, if applicable.
[Zurich American 2012 Policy Form]

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CONFIDENTIAL
Elements of Coverage Under Claims-Made
and Reported Policies
1. A wrongful act that falls within the coverage grant
2. The wrongful act takes place after the “retroactive date”
3. A claim made against the insured during the policy period
or the extended reporting period
4. The reporting of the claim to the insurer during the policy
period or the extended reporting period
5. No exclusions apply

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Key Issues in Claims-Made Coverage

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Wrongful Acts
• First step -- find the right policy
• CGL or professional services?
• Marx v. Hartford Accident and Indemnity (Nebraska 1968)
“A ‘professional’ act or service is one arising out of a vocation,
calling, occupation, or employment involving specialized
knowledge, labor, or skill, and the labor or skill involved is
predominantly mental or intellectual, rather than physical or
manual. … In determining whether a particular act is of a
professional nature or a ‘professional service’ we must look not
to the title or character of the party performing the act, but to
the act itself.”

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Did the Wrongful Act Take Place After the
Retroactive Date?
• Most claims-made policies require that the wrongful conduct
take place after the retroactive date
“[S]uch act, error or omission must commence on or
after the “retroactive date” and before the end of the
“policy period””
[Zurich 2011 E&O Policy]
• Best practices:
– Drive the retro date as early as possible
– And, never change the retroactive date

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What is a Claim?
• Typical E&O policy definition:
“Written demand or notice against any Insured” or “a civil,
administrative, or regulatory investigation against any
insured”

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What is a Claim?
• Typical D&O policy definition of “Claim”:
(a) a written demand for monetary or non-monetary
relief against an Insured Person or, with respect to Insuring
Agreement C, against the Insured Organization; including a
request to toll the statute of limitations;
(b) a civil or criminal judicial proceeding or arbitration
against an Insured Person or, with respect to Insuring
Agreement C, against the Insured Organization;
(c) a formal administrative or regulatory proceeding
against an Insured Person; or
(d) a formal criminal, administrative, or regulatory
investigation against an Insured Person, including the receipt
of a Wells Notice to an Insured Person;

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What if “Claim” is Not Defined
• Many policies do not define “claim”
• Courts apply common-sense definitions:
– “A demand on the insured for damages resulting from the
insured's alleged negligent act or omission”
– “A demand for something as of right”
– “An effort by a third party to recover money from the
insured”

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What is a Claim?
• There is no clear answer:
– A request for information - NO
• Hoyt v. St. Paul Fire and Marine (9th Cir. 1979)
– A demand for regulatory compliance - NO
• FDIC v.Mijalis (5th Cir. 1994)
– Letter to former counsel demanding counsel rectify
problems created for plaintiffs - YES
• McCabe v. St. Paul Fire & Marine Ins. Co. (N.Y. 2010)

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Was the Claim Reported Timely?
• Under claims made and reported policies, the claim must be
reported during the policy period or the extended reporting
period
• Many claims-made polices have standard 60-day extended
reporting periods
• Examples of other extended notice/reporting periods
– Run-off period
– Discovery period

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What is Effective Notice?
• No “magic” to notice
• Notice must go to the insurer – reporting to the broker is not
sufficient
• Provide notice under all potentially applicable policies
• Provide the relevant facts: claimant, nature of claim, date of
claim, relief sought (money or other)
• Do not rely solely on the broker

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Run-Off Period
• D&O policies terminate upon a change in control
• A run-off policy can be purchased to extend coverage for
claims relating to pre merger conduct
• Run off coverage protects executives from claims arising
after the change in control
– BUT, the claim must arise from conduct before the
change in control

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Discovery Period
• Additional period of time during which a claim can made and
trigger coverage under the policy and during which the
insured can report such claims
• Can be purchased when the policy is cancelled (e.g., due to
merger or acquisition) or when insurer refuses to renew
• The claim(s) must arise out of conduct that occurred before
the end of the policy period or the date of cancellation
• Duration of period is usually six years

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Reporting is Essential to Coverage
• With claims-made and reported policies, reporting is a
condition of coverage
– Majority rule: If notice is untimely, no coverage exists
regardless of prejudice to the insurer
– Minority rule: The insurer must show prejudice to deny
coverage

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No Seamless Claims-Made Coverage
• Many courts have held that successive claims-made and
reported policies do not create seamless coverage
– The insured must provide timely notice under the correct
policy
• No coverage because claim was not first made and reported
during a single policy period. Pizzini v. American Int’l
Specialty Lines (PA 2002)
• Renewal of claims-made policy does not create a single
policy for the purposes of reporting. Quinones. V. Jimenez &
Ruiz (Puerto Rico 2003)

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CONFIDENTIAL
Notice of Claim
2004 - 2005 Policy Period 60 Day ERP
Insured served with a lawsuit resulting
from EEOC complaint. If insured reports
to carrier, no coverage applies because it
was not reported during the policy period
or ERP.
2005 – 2006 Renewal Term
If the claim were made and reported
during this period, coverage would apply.
Insured receives discrimination
complaint from EEOC
(i.e. Claim by Policy definition).
Insured does not report to Carrier.

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CONFIDENTIAL
Notice of Claim
2004 - 2005 Policy Period 60 Day ERP 15 Days
Insured later
served with lawsuit
for harassment and
reports to
Insurance
Company 15 days
after ERP. Insured,
therefore, is not
covered since the
claim is not
reported during the
policy period or
ERP.
Employee sends e-mail to supervisor stating he/she
is being harassed and asks the supervisor to
intervene by moving him/her to another department
(i.e. Claims: Non-Monetary Demand).
Insured must report to carrier during
this period to ensure coverage.

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Insuring the Event That is not yet a Claim -
Notice of Circumstances
• Notice of circumstances clause:
“The insured shall provide notice as soon as practicable of
any circumstances of which they shall become aware during
[the policy period] … which may give rise to a loss or claim
against them.
"Such notice having been given, any loss or claim to which
that circumstance has given rise which is subsequently
made after the expiration of [the policy period] … shall be
deemed for the purpose of this insurance to have been
made during the subsistence hereof."

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Interrelated Acts Exclusion
This Policy excludes all “Loss arising from any Claim . . . based upon,
arising out of, directly or indirectly resulting from
(a) any fact, circumstance, transaction, event or Wrongful Act
that, before [the policy’s inception date], was the subject of any notice of
Claim or Loss, or notice of potential Claim or potential Loss, given under
any other policy of insurance;
(b) any fact, circumstance, transaction, event or Wrongful Act of
which, as of [the policy’s inception date], any Insured had knowledge and
that was reasonably likely to give rise to a Claim that would fall within the
scope of the insurance afforded by this Policy; . . . , or

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Interrelated Acts Exclusion
• Bars coverage for:
– Claims where the insured provided notice to an earlier insurer
– Claims where the insured had notice of a fact or circumstance
that might give rise to a claim
• And, bars coverage for “interrelated wrongful acts,” which are
defined as
– "any Wrongful Act that is logically or causally connected by
reason of any common fact, circumstance, situation,
transaction or event."

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Coverage for Pre-Tender Defense Costs
• Both occurrence and claims-made policies contain the same
condition limiting coverage for “voluntary payments”
• Sample “voluntary payments” condition:
“No insured will, except at that insured’s own cost,
voluntarily make a payment, assume any obligation, or
incur any expense, other than for first aid, without our
consent”
• Payments made prior to notice are not covered – no
prejudice required

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CONFIDENTIAL
Buying the Claims-Made Policy

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Buying the Claims-Made Policy
• Buy only from a highly rated company
• Consider policy premium, or retention, limits and
claim capabilities of the insurer
• Compare offerings from multiple carriers
• If you can, buy a claims-made policy, not a claims made and
reported policy, because the latter requires notice withing
the policy period
• Consider the policy definition of claim – make it as broad as
possible

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Buying the Claims-Made Policy
• Complete the application carefully and thoroughly – do not
rely solely on the broker
• Complete a thorough survey, with documentation, of all
employees who might have knowledge of a covered claim
• Provide notice of all facts and circumstances that might give
rise to a claim
• If buying professional liability coverage, make sure that the
definition of professional services is sufficiently broad

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Buying the Claims-Made Policy
• Drive the retroactive date as early as possible
• Make the extended reporting period as long as possible
• Limit the individuals who are capable of receiving notice –
e.g., management personnel
• Review all policy exclusions
• Many policy terms are negotiable

34. www.mcguirewoods.com
Click to edit Master title style
www.mcguirewoods.com
Avoiding the Minefields of
Claims-Made Coverage
Risk and Insurance Management Society
Carolinas Chapter
17 November 2016
L. D. Simmons
McGuireWoods LLP
lsimmons@mcguirewoods.com
704.343.2062