Claims-Made Policy

What is a Claims-Made Policy?

A claims-made policy is an insurance contract that provides coverage based on when a claim is formally reported to the insurer, rather than when the underlying incident or loss event occurred. For coverage to apply, two conditions must both be met: the wrongful act or incident giving rise to the claim must fall within the policy's retroactive date (if any) to the policy expiry, and the claim itself must be submitted to the insurer during the active policy period (or during any extended reporting period). This trigger mechanism is the defining characteristic of claims-made coverage, distinguishing it fundamentally from occurrence-based policies.

Claims-made coverage is standard in professional liability lines — professional indemnity, directors and officers (D&O), errors and omissions (E&O), medical malpractice, and cyber liability. These classes are characterized by long reporting tails: the act giving rise to a claim may predate the actual claim by years or even decades, making an occurrence trigger difficult to price and reserve accurately from the insurer's perspective.

Retroactive Date and Prior Acts Coverage

Most claims-made policies include a retroactive date — the earliest date from which the wrongful acts giving rise to a claim will be covered. Acts occurring before the retroactive date are excluded, even if the claim is reported during the policy period. When a policyholder first obtains claims-made coverage, the retroactive date is typically set at the policy inception date (no prior acts coverage). As the policy is renewed year after year with the same insurer, the retroactive date may be moved back to provide continuous coverage for acts going back to the original policy inception, giving the insured progressively broader historical protection.

Continuity of coverage is critical. If a claims-made policy lapses — even briefly — or if the retroactive date is reset, the insured loses protection for acts during the gap period. This is a significant pitfall for businesses switching insurers: the new insurer must agree to maintain the prior retroactive date, or the insured will have an uncovered period for acts that occurred with the previous insurer but have not yet been claimed.

Extended Reporting Periods (ERP)

When a claims-made policy expires or is cancelled, any claims arising from acts during the policy period that are reported after expiry are not covered unless an Extended Reporting Period (ERP) — sometimes called a "tail" — is purchased. An ERP allows the insured to report claims arising from acts within the original policy period for a defined additional period (commonly 1, 3, or 5 years) after policy expiry. ERPs are particularly important for professional service firms winding down, retiring professionals, and companies undergoing merger or acquisition where the acquiring entity may not agree to maintain the seller's prior retroactive date.

Claims-Made and Reserving Implications

From the insurer's perspective, claims-made policies are easier to reserve than occurrence policies because the claims liability is bounded: only claims reported during the policy period (or ERP) can attach, limiting the insurer's IBNR exposure. This reserving clarity is a primary reason insurers prefer claims-made for long-tail liability classes. The trade-off is that late-reported claims — incidents that have already occurred but not been reported before policy expiry — fall on the new policy, creating the need for careful management of retroactive dates and transition arrangements at renewal.