What is a claims made policy?

03 October 2018

In this regular feature we take a look at common clauses found in Energy Insurance that are often not well understood and try to look at what their intentions are, and what they cover or exclude.

In this article we look at the ‘Claims Made’ versus ‘Occurrence’ versus ‘Occurrences Reported’ liability wordings.

Liability policies are often referred to as being on a ‘Claims Made’ basis, an ‘Occurrence’ basis or an ‘Occurrence Reported’ basis, but what do these terms mean?

Historically liability policies responded to events that occurred during the period of the policy. As long as the event could be identified as having occurred during the period of a particular policy, any subsequent claim arising out that event would attach to that policy (subject to the event of course not being otherwise excluded). This however meant that liability insurers could effectively never ‘close’ a policy that covered ‘longtail’ exposures (exposures where a claim from an event may not manifest itself until many years later). These policies are typically referred to as ‘Occurrence’ polices.

To be able to close their books on Energy Liability risks, the London Energy market first started to impose Claims Made policies in 1986 with the introduction of NMA 2233 which was superseded by LSW 244 in 1991.

The first evidence of a Claims Made policy however appears in the UK court case of Haseldine v Hosken in 1933 (Haseldine was a solicitor and Hosken, a Lloyd’s underwriter) The London market Joint Liability Committee (JLC) issued a revised London Claims Made Wording in 2003 (JL 2003/2007) that has subsequently been updated (latest version 2013)

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But what is a Claims Made policy?

A Claims Made policy responds to claims first made against the Insured by third parties during the policy period, despite the fact that the particular event that the claim has arisen from may have occurred prior to the policy period. Once the policy period is over, insurers know that no further claims can be made on the policy (as those would then fall on policy in place at the time of the claim being made against the Insured), allowing them to close that year of account.

There are however exceptions to the basic rule that the policy responds to claims first made during the policy period, as follows:

1. Events occurring prior to the ‘Retroactive Date’ –Claims Made policies will always have a retroactive date (which is usually the first date that the Insured changed from an Occurrence form to a Claims Made form, or first took out insurance on a Claims made basis). Events occurring prior to this date are excluded. As polices renew, the retroactive date remains the same to ensure continuous coverage.

2. Occurrences reported to the policy (even though no claim may have been made by the Insured) – Some Claims Made policies will have a provision whereby all claims against the insured regardless when they are received, will be treated as occurring on the day the occurrence was reported to the Claims Made policy (depending on the exact wording this may have a limited period for the claims to materialise, say 5 or 7 years). 

3. Claims made against the Insured during an ‘extended reporting period’ – in order to allow the Insured to have uninterrupted continuous coverage, most Claims Made policies allow the Insured to extend the reporting report in the event that i) Insurers cancel or decline to renew the Policy, ii) the Insured declines to renew the Policy; or ii) Insurers impose the specific exclusion of an occurrence, product or operation upon renewal.

In which case the Insured will have the right to extend the period in which a claim made against the Insured is covered, after the policy period (depending on the exact wording this may for a certain period of years, say 5 or 7 years, and will be at an additional premium).

The third type of policy is an ‘Occurrences Reported’ policy. These polices (such as the XL004 form) are typically offered by the Bermuda Casualty market and act in a similar way to a Claims Made Policy, but instead of being triggered by a claim made against the Insured they are triggered by the Insured notifying insurers of an Occurrence having taken place.

The following graphic shows how the 3 types of polices would respond to certain events:

claims made policy table

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If you require any further information, please contact John Cooper, Managing Director on +44 (0)20 7466 6510 or email john_cooper@jltgroup.com.