Potential Perils of Changing Policy Formats: Occurrence/Claims Made

An insurer of internet liability risks recently changed its policy from an occurrence form to a claims made form, and that prompted a producer to call us asking about the ramifications of that switch. A change going from occurrence to claims made normally shouldn’t be difficult. A change from claims made to occurrence, however, carries risks that the insured and their agent or broker need to carefully consider.

From occurrence to claims made. Because the acts taking place during an occurrence policy are normally covered regardless of when the claim is made, coverage for acts taking place during the policy period remains in place even after the occurrence policy expires or the insured switches to a claims made policy. So, upon expiration of the occurrence policy, the insured normally can begin the succeeding claims made policy with a retroactive date concurrent with inception of the claims made policy. Issues can arise if allegedly related wrongful acts span both the occurrence and the claims made policy periods. It all depends on policy language, but normally the occurrence policy in this scenario will provide coverage at least for the acts taking place during its policy period. The claims made policy may provide no coverage, since the first of the related acts took place during the preceding occurrence policy, or it may provide coverage for at least the acts taking place during its policy period (assuming there is no prior claim or prior knowledge). It depends on what the policy says, and forms do differ on this point.

From claims made to occurrence. This is the more perilous change. The claims made policy will provide coverage for acts during its policy period (and the retroactive period) when the claim is first made during the policy period, but under this scenario that policy is gone, replaced by the occurrence form; so if the claims made policy is not in effect when the claim is made, there is no coverage. An occurrence policy normally covers only acts taking place during the policy period, so it won’t cover acts that took place during the preceding claims made policy.

One option to avoid the gap in coverage is to try to persuade the new carrier with the occurrence form to provide prior acts coverage. This can sometimes be done but often isn’t favored by insurers. If it is done, the carrier likely will only provide the prior acts on the occurrence form for the first policy year. Once that’s done, those acts are covered under that first occurrence policy period, irrespective of when the claim is first made and the prior acts coverage does not have to be added to the subsequent renewal. If the carrier carried the prior acts coverage into a second occurrence policy, the carrier might be stacking limits, and it won’t want to do that.

Another option is to purchase extended reporting coverage, so-called tail coverage, from the expiring claims made insurer. This normally will secure coverage for the acts taking place within the period of time covered by the claims made policy, as long as the claim is first made during the extended reporting period. One drawback is that sometimes the extended reporting coverage is limited in time, perhaps only a year or two. If a claim is first made after the extended reporting period expires, there is no coverage.

Once again, there can be problems if related acts spanned both policy periods. There’s also a possibility of duplicate coverage. It just depends on the terms of each policy and a careful review of the terms of each policy – before making the switch – is a good place to start in evaluating potential problems. Prior knowledge of either a claim or of circumstances that may be expected to lead to a claim also creates a problem and generally will lead to a lack of coverage.

Applicable law also can play a role in sorting out coverage, and it may be advisable for the insured or the producer to consult with a qualified attorney in the applicable jurisdiction.