Legal Malpractice Insurance: Claims-Made Coverage, Part 1 of 5: vs. Occurrence Coverage

Legal Malpractice Insurance Claims Made v OccurrenceFor decades, all property-casualty insurance polices were occurrence policies, which cover claims that arise out of incidents that happen during the policy period, regardless of when the claims are made. For example, if your auto pol-icy runs from January 1, 2016 – December 31, 2016, and you rear-end another car dur-ing this period, you’ll be covered if the other driver sues you, evens if it’s not until years later, long after your policy has expired.

Most property-casualty insurance policies – i.e., auto and homeowner’s, general liability and workers compensation, – are still underwritten as occurrence policies; however, ac-cording to Fred Fischer’s “A Review of the Modern Claims Made Form”, insurers con-cluded that the occurrence policy was inadequate for professional liability insurance, i.e., medical and legal malpractice policies, because unlike a driver who’s rear-ended or a homeowner who sustains a fire, “rarely are clients immediately aware of a (profession-al’s) wrongful or erroneous actions… because (they) seldom cause immediate injury… (they) may not manifest in client injury until long after”.

As a result, when professional liability insurers were deciding what premium to charge a doctor, lawyer, etc., who had applied for a policy, they had to forecast a) the likelihood that one or more of the doctor or lawyer’s clients would discover an injury and file a claim against him or her after the policy had expired, and b) the costs they would incur to re-solve such claim(s); their forecasts were usually inaccurate, so the premium they had charged often failed to properly reflect the risk they had assumed by providing coverage.

In other words, they were paying out too much money to resolve claims relative to the premiums they had charged, and were therefore either losing money or not earning enough profit.

Insurers’ desire for “greater actuarial certainty” that no claims would be made after an insured’s policy period ended was a key factor in the search for alternatives to the oc-currence policy. This search culminated in the development of the claims-made policy in 1964; by 1976, “claims-made policies and the number of carriers offering them flour-ished”.

Today, all professional liability insurance policies are claims-made, although they’re more accurately called “claims-made and reported” (see next post).

However, despite its widespread use, the claims-made policy still confuses many pro-fessionals, including attorneys, who think that once they buy it, they’re covered forever. This can result in their being denied coverage for a claim because they didn’t comply with their claims-made policy’s strict claim-reporting requirements, or cause a gap in their coverage if they change insurers or jobs, which will put their personal assets at risk if they’re then sued for malpractice.

We’ll explain these claim reporting requirements – and how to avoid coverage gaps – in future posts.

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