A Video Explaining the Difference Between Claims Made and Occurrence Policies

Errors & Omissions & the Claims Made & Reported Policy

When purchasing errors and omissions insurance the insured must be aware that the policy will invariably only respond to claims that are made and reported during the policy period. further, since the application becomes a part of the policy and is incorporated into the policy the insured is warranting the absolute truth of every statement made in the application.

Claims-Made policies are common in the professional liability insurance market. They differ from traditional “occurrence”-based policies primarily based upon the scope of the risk against which they insure. With claims-made policies, coverage is provided only where the act giving rise to coverage is discovered and brought to the attention of the insurance company during the period of the policy. The essence of a claims-made policy is notice to the carrier within the policy period. Claims-made or discovered policies are essentially reporting policies. If the claim is reported to the insurer during the policy period, then the carrier is legally obligated to pay; if the claim is not reported during the policy period, no liability attaches.

Insurance companies favor claims-made policies because they allow for a more precise calculation of risks and premiums. There is no long-tail liability of losses that occurred during the policy period of an “occurrence” policy but reported dozens of years later. This theoretically results in lower premiums for an insured since there is no open-ended “tail” after the expiration date of the policy.

In Personal Resource Management, Inc. V. Evanston Insurance Co., 7 N.E.3d 1025, 2014 WL 962930, (Ind.App. 03/12/2014) Personal Resource Management, Inc. (“PRM”) and Margaret A. Ditteon (collectively “the insureds”) appealed the trial court’s entry of summary judgment in favor of Evanston Insurance Company on the insureds’ complaint alleging breach of contract.

The Indiana court of appeal chose the easy route to resolve this dispute – it found the claims were not made within the policy nor were there acts that did not fit within the definition of “professional services.” It could have concluded the policies were acquired as a result of misrepresentation of material facts, that there were no prior losses, and that the insured knew of no potential claims. These facts allowed the insurer to declare the policy void based on the standard fraud, misrepresentation or concealment condition or to rescind the policy from its inception since it was acquired as a result of fraud or material misrepresentation since every statement of fact in the application was agreed by both to be material.

Courts have found that claims made policies do not offend public policy and serve a useful function in permitting insurers to more closely control the risks they wish to insure. [Scarborough v. Travelers Insurance Company, 718 F. 2d 702 (5th Cir. 1983); Langley v. Mutual Fire, Marine and Inland Insurance Company, 512 So. 2d 752 (Ala. 1987); Zuckerman v. National Union Fire Insurance Company, 495 A. 2d 395 (N.J. 1985) And Gulf Insurance Company v. Dolan, Fertig and Curtis, 433 So. 2d 512 (Fla. 1983).

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4