What Is A Claims-Made Policy and How Does It Work?

Professional liability insurance policies typically are written on a claims-made basis. It’s important to understand what this means for your coverage and when to report any claims or potential claims that might arise from current or former clients.

Basics of Claims-Made Policies

A claims-made policy differs from most other forms of insurance policies in the way claims are reported and handled. The professional liability policy that is active at the time a claim is made is the one that is responsible for covering any potential damages arising from the claim—even if the error that gave rise to the claim happened in prior years.

For example, presume a former client informs you today that you made an error in May 2020 and demands compensation from you. You had a policy with Insurer A in 2020 but switched to Insurer B in 2023. Even though the error occurred while you were covered by Insurer A, Insurer B, which holds the current policy, would be responsible for covering the claim.

It’s important, however, that you had coverage in place at the time the error occurred and that your current policy has a prior acts retroactive date that precedes the date the error occurred. The prior acts retroactive date determines how far back coverage is provided for your past acts.

And most critical, you must continuously renew and maintain your professional liability insurance coverage to keep your prior acts retroactive date in place. If you allow your policy to lapse, even for a short period, you will lose your prior acts retroactive date and have no insurance protection for errors alleged or committed prior to the effective date of a new policy.

Once you purchase your first professional liability insurance policy, it’s essential to faithfully continue your coverage every year until you permanently retire from practice (at which time tail coverage comes into play). Even if you use a series of carriers throughout your career, if you maintain continuous insurance, your protection will extend back to the initial effective date of your first policy.

What Constitutes a Claim?

Professionals should understand that a malpractice claim doesn’t necessarily mean an error was committed or a settlement is likely. In fact, a study by the ABA Standing Committee on Lawyers’ Professional Liability found that more than two-thirds of claims brought against attorneys over a four-year period were abandoned without payment. Only 19 percent of all claims during the study resulted in payment to a claimant.

Insurers tend to define what constitutes a claim broadly. Rather than being limited to the actual filing of a lawsuit, a claim also includes any demands you may receive for money or legal services. By keeping the definition broad, insurers require their insureds to report claims early so they can work proactively to minimize any potential damages.

In fact, many policies require insureds to report an issue as soon as it becomes apparent that it may become a claim. To protect your coverage, err on the side of over-reporting potential claims. The reporting of matters that never develop into actual claims should not affect your future premiums.

Because mistakes are often discovered long after they are made, claims-made policies have become the norm in professional liability insurance. It’s important to understand your policy so you know what to do in the event a claim is filed against you.

If you have questions about your coverage or concerns about potential gaps that may leave you unprotected, the professionals at ProDefender are available to review your current policy.