Bank Insurance - The Unique Issues of Claims-Made Insurance
By Scott Simmonds, CPCU, ARM, CMC

Most casualty insurance policies (general liability, automobile, workers' compensation) pay for events that occur during the policy period. For example, an auto insurance policy will pay for an accident that occurs while the policy is in force. D&O policies, however, pay for lawsuits filed during the policy period; the wrongful act could have occurred years before. Claims-made policies respond only when a suit is filed, or when a strong threat of a suit exists.

Claims-Made Policy: Pays based on the date of the lawsuit.
Occurrence Policy: Pays based on the date of the accident or occurrence.

The downside of a claims-made policy comes if the policy is canceled.

Example: A D&O policy is put in force January 1, 2000, and is renewed in 2001 and 2002. In 2003, however, the organization decides to end the coverage, as the premium has increased. Six months later, a letter from an attorney arrives announcing a lawsuit for discrimination in hiring that occurred in 2002. No coverage. Although the policy was in force at the time of the alleged discrimination, the policy was not in force when the suit was filed. The solution to this problem is the extended reporting period found in most policies (see the next paragraph).

Discovery Period / Tail / Reporting Period Issues
Claims-made policies provide protection for lawsuits and actions brought during the policy period. In the event that coverage is replaced or cancelled, protection may be desired for events that took place prior to expiration / cancellation but for which no claim has yet been filed. This is called a "tail" or "extended reporting period.”

Issues to consider:

Can the insured buy the Extended Reporting Period (ERP) at their option or only when the insurance company cancels the policy?

For what time period is the extension of reporting valid?

What is the premium for the ERP?

In what time frame must the Insured decide to buy the ERP?

Retroactive Date
Claims-made policies respond to claims brought during the policy period as long as the occurrence (the date of the wrongful act) takes place after the "Retroactive Date.” When changing insurance companies it is vital to understand the new policy retro date. The use of a "Tail" may be necessary if the retro date is not sufficiently in the past.

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