Timing is Everything for Business Owners When it Comes to Liability Insurance

A small manufacturing company that makes widgets (every insurance education course always talks about a company that makes widgets, it’s a rule) carries an errors & omissions liability policy in case they make a mistake. They switched insurance companies a few years back without any lapse of coverage.

Wouldn’t you know it, a vendor who they used a few years ago is now suing them for a product defect.  Yuck.  Well, fortunately they have had continuous liability insurance so at least there will be coverage, right?  Not necessarily.

Although business liability insurance is complicated, most people understand the basic concepts of this type of coverage.  Such as if a business screws up causing bodily injury or property damage, coverage will most likely be provided.

But what about the timing on when a claim occurs?  Does that make a difference….Absolutely.

Liability Insurance policies can be written on two separate types of policy forms.  Let me first explain these two different forms and why understanding which form you have is so important.

1) Claims Made

A method of providing liability insurance in which the insurer agrees to cover all claims asserted against the insured during a specified date period regardless of when the claim occurred. All claims-made policies have a retro date which specifies the beginning date for claims to be considered.

Let me sum this up in basic English.  On a claims made policy, a claim (loss) must occur during the specified policy period for it to be covered.

2) Occurrence

A type of liability policy in which an insurance provider is liable for any claim which occurred during the policy period regardless of how far in to the past it occurred. This is the traditional type of liability policy but has lost favor because of lawsuits being brought years after the fact. Large liability risks are typically covered by claims-made policies which are responsible only for claims submitted during the covered policy period.
Let’s go back to my widget manufacturing company.  Let’s say they had a claims made policy in place during the time when the error occurred with their vendor.  Remember how they switched to a new insurance company?  Well, if the new insurance company put them on an occurrence form, they may have a very big problem.

Since the claim was made outside of the first insurance company’s policy period (claims made remember) no coverage would be provided under the initial policy that was in effect at that time.

What about the new policy?  Because the new policy was written on an occurrence form and the claim did not occur during that policy period, no coverage would be afforded on that policy either.

Are you confused yet?  Me too, but there are 3 easy steps you can take to prevent this from happening.

1) Understand what type of liability policy your business carries and has carried in the past . It sounds simple enough, but I am amazed on how many business owners have no idea.

2) If you have been carrying a claims made policy for a long time ensure you have a retro date that goes back as far as possible.

3) If you switch from a claims made policy to an occurrence policy ask your agent about purchasing “tail coverage”. This will protect your business from prior losses or claims that have not yet been discovered. 

The bottom line is that you need to be aware of these two types of coverage forms and how they are different.  Don’t just assume past claims would be covered.  These concepts can be confusing, but don’t underestimate their importance.

**Disclaimer, these are only basic concepts and scenarios.  Each business has its own unique situations so you need to speak with your agent to determine your specific needs and exposures.