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

If you’re shopping for professional liability insurance, you’ve probably come across the term claims-made policy. Understanding how this type of coverage works is essential for protecting your business against malpractice claims and financial risks. This guide explains what a claims-made policy is, how it differs from other insurance types, and why continuous coverage and retroactive dates are critical.

What Is a Claims-Made Policy?

A claims-made policy provides coverage for claims only if the claim is reported while the policy is active. Unlike occurrence-based policies, which cover incidents that happen during the policy period regardless of when the claim is filed, a claims-made policy focuses on the timing of the claim. Most professional liability insurance policies are written on a claims-made basis because professional errors are often discovered years after they occur.

How Does a Claims-Made Policy Work?

Here’s an example: Suppose a former client contacts you today about an error you made in May 2020. At that time, you were insured by Company A, but you switched to Company B in 2023. Even though the error occurred under Company A’s coverage, Company B—the insurer holding your current policy—would handle the claim.

However, two conditions must be met for coverage to apply:

• You had insurance in place when the error occurred.
• Your current policy includes a retroactive date that precedes the date of the error.

The retroactive date determines how far back your coverage applies. If your policy lapses—even briefly—you lose that retroactive date and may have no protection for past acts. Maintaining continuous coverage is essential to preserve this protection.

Why Continuous Coverage and Tail Coverage Matter

Once you purchase your first professional liability insurance policy, it is critical to renew it every year without interruption. Even if you change carriers, continuous coverage ensures that your protection extends back to the original effective date of your first policy. If you retire or stop practicing, you will need tail coverage, which allows you to report claims after your policy ends.

What Counts as a Claim?

Many professionals assume that a claim only occurs when a lawsuit is filed, but insurers define claims broadly. A claim can include any demand for money or legal services, even if no formal litigation has started. This broad definition encourages early reporting, which helps insurers manage potential risks before they escalate.

Most policies require you to report issues as soon as you suspect they could lead to a claim. Over-reporting is better than under-reporting because failing to notify your insurer could jeopardize your coverage. Reporting potential claims that never materialize typically does not affect your premiums.

Claims-Made vs Occurrence Policies

The key difference between claims-made and occurrence policies is timing. An occurrence policy covers incidents that happen during the policy period, regardless of when the claim is filed. A claims-made policy only covers claims reported while the policy is active. Because professional errors are often discovered years later, claims-made policies have become the standard for professional liability insurance.

Key Takeaways

A claims-made policy offers essential protection for professionals, but it requires careful management. Continuous coverage, a valid retroactive date, and tail coverage are critical to avoid gaps. Always report potential claims promptly to safeguard your coverage.

If you have questions about your professional liability insurance or want to ensure there are no gaps in your protection, the experts at ProDefender can review your current policy and help you stay covered.