‘Claims Made’ Liability Insurance
Most liability insurance policies are ‘claims made’ policies, some of which include:
…………………… but what does claims made actually mean?
An insurance policy covers you for an event that occurs during a period of time, usually 1 year. For example: with a motor vehicle policy, the accident (and damage) must occur during the policy period; with a business assets policy, the damage to property must occur during the policy period; and with a ‘claims made’ policy, the claim for compensation, damages or penalties must occur during the policy period..
The important point is that the date that the claim for damages, potential fine, compensation (whatever the loss that is covered) is made against you, must fall within the policy period. It is NOT the date that you did the work or provided the service that has led to the claim being made.
This is a very common misconception with professional indemnity insurance, and ‘claims made’ policies. Many people we help at GSI Direct believed that if they had an insurance policy in place when they did work for a client that this policy would cover them if they then had a claim months or years afterwards.
To clarify further, the date when the claim occurs is usually further defined as the date that you become aware of a situation that could reasonably be expected to give rise to a claim being made against you. i.e. The date at which it is known that a claim regarding a specific event / action / piece of advice will possibly be made by the aggrieved third party.
Some Examples in Action
You have a professional indemnity and statutory liability policy in place from 1 January 2015 to 1 January 2016.
- You give advice in 2012 to a client on which IT system to implement..
- In 2014 that client decides that it was completely the wrong system for their needs and there was a better piece of software. They have lost $20,000 but they don’t tell you yet.
- In June 2015 they decide they want to make a claim against you at which time this is the first you learn of the issue. Through ongoing discussions and legal advice you decide to settle and pay them the $20,000 they have lost, because your advice was likely to have been negligent.
- Claims made date: The claim was made against you in June 2015 and therefore it will be covered by the policy you have in place from 1 Jan 2015 to 1 Jan 2016. It is not the date you gave the advice in 2012, or when the client suffered the loss, or when the client believed the advice to be wrong.
- An employ is seriously injured at work in December 2015 and it is reported through to worksafe before the end of the year.
- You have a statutory liability policy from 1 Jan 2015 to 1 Jan 2016.
- Worksafe start an investigation into the accident and your health and safety procedures in March 2016.
- You were fined $25,000 and order to pay reparations of $32,000 to the employee in September 2016.
- Claims made date: The date at which you knew an investigation and fine could reasonably be expected to be made against your company was when you reported it through to worksafe in December 2015. It is therefore covered by the policy 1 Jan 2015 to 1 Jan 2016.
Disclaimer: There are other factors and policy exclusions that may influence whether a claim is covered by a policy or not. Policy coverage will solely be determined by the policy documents and policy wording, and no reliance can be placed on the content of this blog post whatsoever. The content and examples of this blog post are only given to provide a general understanding or to help explain a specific concept.