Liability insurance – what is the difference between ‘claims made’ and ‘claims occurring’ policy cover
Business insurance covers typically fall into two categories. Firstly, there is cover for physical assets, such as machinery, plant, computers, stock and buildings. Secondly, we have liability cover, for injuries to people, damage to property and financial loss (usually from negligent advice).
Policies are available for physical assets and liabilities on their own, or both of these covers in one policy, such as a commercial combined insurance policy.
Most policies will run for one year, with an annual renewal date. If you have a commercial property owners insurance policy, for a building, running from 1st January to 31st December, the cover is easier to understand. If the building is damaged by storm on the 28th January, a claim would be made against the cover in force, at the time of the loss.
Liability insurance covers, including professional indemnity and directors & officers liability are slightly more complex. Damage to property is, usually, noticed fairly soon. Claims under liability policies are nearly always submitted weeks, months and even years later.
There are two bases of cover for liability insurance, claims made and claims occurring. It is very important that a business understands which basis of cover they have. If the wrong type of cover is selected, this can have a significant effect on whether cover will apply. Before we go on to explain the two types of cover, we’d like to provide some reassurance. If you use an independent business insurance broker, they’ll work out your business insurance needs and offer you suitable cover.
If you choose to compare business insurance online, you may not receive advice as to the suitability of the cover. We strongly urge businesses to always work with a broker.
This type of policy will meet claims that are made during the current policy period. Claims can be in respect of work undertaken in the current policy period, or (importantly) before.
If we look at a made up example. Absolutely Amazing Architects started trading on the 1st January 2000. During 2004 they worked on a project to design a new shopping centre.
The shopping centre was built during 2005 and opened in November.
In 2006, it transpired that due to incorrect materials being used in the roof, rain water seeped through and caused damage to the building. The shopping centre policy paid out £100,000 for damage caused by the water. Their insurers are looking to recoup their losses because Absolutely Amazing Architects specified the wrong roofing materials, which were not suitable to protect the building during heavy storms.
As well as recouping their losses, the shopping centre owners we’re looking to seek costs as they had to spend £200,000 replacing the incorrect roofing material. This cost was not covered under their commercial property owners policy, as defective design is a standard exclusion.
A claim for £300,000 is made, against Absolutely Amazing Architects professional indemnity insurance policy, in late 2006. The insurers in 2006 were different to those in 2004, when the incorrect design work was undertaken. However, as the professional indemnity insurance is on a claims made basis, the 2006 insurers policy will pay out on the claim.
This is the date that cover was first taken out. Our architects 2006 policy will only pay out, if the work (which caused the claim) was taken out after the retroactive date. Essentially, there needs to have been continuous cover in force (with any insurer). If our architects only took out a policy in 2006, then the claim for the negligent design work in 2004 would fail.
These policies cover claims that occur during a policy period, irrespective of when a claim is made.
A business has an employers liability insurance policy, running from 1st January 2000 to 31st December 2005. If they cease trading in 2005, they could have an employee submit a claim in 2006, for an injury that occurred during 2005. Even though the policy is no longer in force, the claim will be met. The incident that caused the injury occurred when there was a policy in force and this is the important point.
Continuation of cover
Many businesses do think that they can cease, or reduce, their cover. If you have liability cover, particularly professional indemnity, you must take advice from a broker before considering cancelling or reducing your cover, even if your business activities are reducing or the business stops trading.