By Rabih Hamawi, CPCU®, CIC, CRM, LIC, MSF
Copyright © 2023 Rabih Hamawi
Generally, there are two types of liability insurance policies: occurrence-based and claims-made policies. Occurrence-based are the more common type of liability policies. Auto, homeowners, and commercial general liability policies are occurrence-based. Professional and pollution liability policies are generally claims-made policies.
Although the distinction between the two may appear simple at first, successive policy periods, including renewals with different insurers, and changing retroactive dates, may complicate the ultimate question: Which insurer owes the duty to defend and indemnify?
Occurrence-based policies cover any claim that arises out of an “occurrence,” as defined in the policy. The “occurrence” must take place during the policy period, and must be reported timely to the insurer. For the types of claims covered by occurrence-based policies, the liability-causing event can easily be traced to a specific date because it is based on a specific event, usually an “occurrence” causing injury.
Claims-made policies provide coverage that is triggered when a claim is made against the insured during the policy period (or during the extended reporting period if the policy has
expired, and there is no successive policy), regardless of when the wrongful act that gave rise to the claim took place. Some pollution liability policies may require that any claim be discovered and reported to the insurer during the policy period.
Claim-made policies typically have a retroactive date, which is a provision that eliminates coverage for claims produced by an injury or wrongful acts that took place before a specified date, even if the claim is first made during the policy period.
Claims-made policies are generally more restrictive than occurrence-based policies, and the initial premium is correspondingly less, but it will significantly increase as the date between the policy period and the retroactive date widens. For example, a solo attorney who has been practicing for 20 years will pay more premium for a legal malpractice policy than an attorney that just started his or her practice, in large part, due to the length of the retroactive date’s period.
Apart from these practical reasons, the insurer has economic incentives as well. Since the insurer’s exposure for occurrence-based claims can lie dormant until a statute of limitations
expires, the insurer can’t “close its books” at the end of a policy year. But if the insurer is only obligated for a claim when the claim itself is made in a policy year, then its exposure
is significantly less.
In distinguishing the two types of policies, the Michigan Supreme Court has held that “[a]n ‘occurrence’ policy protects the policyholder from liability for any act done while the
policy is in effect, whereas a “claims made policy’ protects the holder only against claims made during the life of the policy.”
Claims-made policies “are of relatively recent origin and were developed primarily to deal with situations in which the error, omission or negligent act is difficult to pinpoint and may have occurred over an extended period of time.”
Because the two types of policies have fundamental differences, the attorney who is evaluating coverage must fully read the policies somewhat differently and look for different triggers. The attorney must also review any policy applications because “the policy application, declarations page, and the policy itself construed together constitute the contract.”
If a claims-made policy covers a claim that is made and reported during the policy year, is there any limitation on how long before the policy’s inception date the underlying occurrence, wrongful act, or liability-causing event must have occurred?
Insurers love claims-made policies because it limits the extent of their exposure. This is what a “retroactive date” does. It will usually be stated in the declarations page or a policy
endorsement, and it specifies the date after which the underlying event must have occurred for coverage to be triggered. If the underlying event occurs before the retroactive date, then
there may be no coverage, and the insured may be out of luck.
If a claims-made policy doesn’t contain a retroactive date, then generally, the retroactive date is the initial policy’s inception date. But if the insured renews, then the retroactive date
is usually the first date on which the insurer initially provided coverage to that specific insured. If the insured renews with a different insurer, then the insured must request that the retroactive date be the date of the inception of the very first policy. For example, if an insured buys a policy that took effect on January 1, 2020, with no explicit retroactive date, then the retroactive date is January 1, 2020. If the insured renews with a different insurer on January 1, 2021, then the insured must request an endorsement with a retroactive date of January 1, 2020, the date of the very first policy period. If the insured doesn’t, then the renewal insurer may choose a retroactive date of January 1, 2021 for the renewal policy, leaving the insured with no coverage for wrongful acts occurring between January 1, 2020, and January 1, 2021.
Tail or Extended Reporting Period Coverage
When an insured switches his or her claims-made policy from one insurer to another, the insured must pay close attention to the actual effective periods of coverage. With occurrence-based policies, this is generally not a problem. But with claims-made policies, it can be serious. That is why it is also important to look at the policy’s “tail” coverage. A “tail” or an extended reporting period (ERP) provision permits an insured to report a claim even after the policy has expired. ERP is usually a valuable endorsement for those who may be changing their career path, winding down their practice, or retiring.
Another characteristic of claims-made policies is that in addition to requiring that the claim be made in the policy period, it must also be reported to the insurer during the policy period, within the time limits reflected in the policy. Most policies allow a short grace period, so that if a claim comes in the last day of the policy year, the insured will not be deprived of coverage by late reporting. Even when a policy doesn’t include a short grace period, depending on the purpose of the policy, and whether coverage is required due to a statute or a regulation, there may be an automatic additional grace period for claims-reporting purposes.
Late Notice and Prejudice
On the one hand, in Schubiner v New England Ins Co, 207 Mich App 330; 523 NW2d 635 (1994) holds that “[w]e decline to apply the general insurance principle that the insurer must show prejudice where it is claiming lack of notice.” On the other hand, MCL 500.3008 makes no distinction at all between claims-made and occurrence-based policies and provides that the failure to give timely notice “shall not invalidate any claim made by the insured if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible.”
Michigan law disfavors forfeitures, and courts have consistently also held that “untimely notice will not excuse an insurer’s obligation unless [the insurer] can prove it was actually
and materially prejudiced by the delay.” This actual-prejudice requirement is especially important in heavily regulated and statutorily required insurance policies because the parties’ freedom of contract can’t annul statutes or regulations.
In expressing their disfavor, Michigan courts focus on the purpose of the notice provisions in an insurance policy which is to “allow the insurer to make timely investigation…in order to evaluate claims and to defend against fraudulent, invalid, or excessive claims.”
Whether a late notice actually prejudiced an insurer’s right is generally a question of fact to be left to the jury. In determining whether an insurer’s position has actually been prejudiced by the insured’s untimely notice, courts consider whether the delay has materially impaired the insurer’s ability: 1) to investigate liability and damage issues to protect its interests; 2) to evaluate, negotiate, defend, or settle a claim or suit; 3) to pursue claims against third parties; 4) to contest the liability of the insured to a third party; and 5) to contest its liability to its insured.
Read the Insurance Policy, including any Policy Applications
Regardless of whether it is an occurrence-based or claims-made policy, to ascertain whether a policy insures a specific peril, occurrence, or wrongful act, it is always crucial to read the whole policy, including the declarations page, the policy’s endorsements, and the policy’s applications, which when construed together constitute the insurance contract.
About the Author
Rabih Hamawi is a principal at Law Office of Rabih Hamawi, P.C. and focuses his practice on representing policyholders in fire, property damage, and insurance-coverage disputes with insurers and in errors-and-omissions cases against insurance agents.
He has extensive expertise in insurance coverage and is a licensed property and casualty, life, accident, and health insurance producer and counselor (LIC). He earned the Chartered Property and Casualty Underwriter (CPCU), Certified Insurance Counselor (CIC), and Certified Risk Manager (CRM) designations. Rabih Hamawi is the current chairperson of the Insurance and Indemnity Law Section. He is a frequent author on insurance and indemnity topics.