Should You Buy a “Claims-Made” Insurance Policy?
One of the most important things to understand about commercial insurance policies is what’s called “claims-made policies.” If you own a business, you need to understand this, because if you don’t, it could cost you everything.
When you purchase standard business insurance such as professional liability coverage, you’ll likely be offered two options: a claims-made policy and an occurrence policy. The online definition of occurrence policy is: “Insurance that pays claims arising out of incidents that occur during the policy term, even if they are filed many years later.”
Most standard commercial policies are claims-made policies. Although there are many variations, Claims Made and Reported policies are most common. These policies sound simple – they pay for claims made during the time you hold your policy – but it can get more complicated: It hinges on the time period in which your policy is active.
Businesses can be sued long after they’ve finished work – and after insurance policies have been canceled.
And that’s the issue: If, for example, the materials used in your products were identified as being dangerous, or the structure your company erected turned out to be constructed in a way that pointed to negligence – and this didn’t happen until years after the work was done – you can still be sued.
Policy must be active at two points
Although your policy would cover claims just like any kind of insurance policy would, there’s a common misunderstanding. In order for a claims-made policy to cover things you’re liable for, either because of negligence or because of the use of faulty or dangerous materials, your policy needs to be active at two points:
- when the claim is reported to your insurer, and
- when you performed the work.
For example, say you owned a computer repair shop from 2009 to 2011. You buy a claims-made policy we’ll call Policy A. This business insurance policy is active from 2009 to 2011, and then you cancel it, either because you’re changing businesses, closing down, or purchasing a new claims-made policy.
Six months after you’ve closed down or moved on, a claim is filed against you for using defective/damaged parts during the time you were covered by Policy A (from 2009 to 2011). Unfortunately for you, in this instance, your claim won’t be covered.
All too often, a policyholder assumes Policy A would cover claims stemming from work done while insured under Policy A, even if they no longer have the policy.
It wouldn’t, though; you, the policyholder, have to meet both the aforementioned requirements for claims to be covered under Policy A.
Because Policy A is now cancelled, it’s not going to cover claims arising from work you did while insured under it.
The chance of this happening depends on the type of work you do, so take that into consideration. And although you may subscribe to the adage, “never look back,” many claimants do.
Talk with your insurance agent to find out whether a claims-made policy is right for your business.