Category Archives: claims-made

Are Claims-Made Product Liability Policies Cheaper? Yes And No!

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One of the primary reasons many businesses purchase a claims-made product liability policy is the perception that it is cheaper than an occurrence based policy. 

On the surface, claims-made policies can be cheaper than their superior counterpart, occurrence based policies.  However, when you examine claims-made policies closer, you may find, in the long run, they can cost more than occurrence based policies.   This is something many agents do not tell their clients because they either do not understand claims-made policies or know most applicants focus on the short-term cost and it is easier to make a sale by having the lowest premium cost.

The first question that comes to mind is why are claims-made policies initially cheaper than occurrence based policies?  One answer is your claims-made insurance carrier has the option to cut their losses should a product or products be defective and have the potential to cause bodily injury or property damage.  Remember for a claim to be covered by a claims-made policy you must have both the incident  involving your product and the claim during the policy period or the Extended Reporting Period.  With an occurrence based policy you only have to have an incident or occurrence during the policy period in order to be covered.  So if your business where to release a defective batch of products into the market place and a product recall was necessary or you had a claim that was reported to your insurance carrier, your claims-made insurance carrier could cut their losses by canceling or non-renewing your policy.  The end result could be that you have defective products in the market place in which several incidences or occurrences of bodily injury or property damage have taken place with no coverage because the claims-made insurance carrier has cancelled or non-renewed your policy.   The uncovered cost of discovery and defense cost alone could bankrupt most small to medium sized businesses should they experience this type of scenario.

Another reason claims-made policies may be initially less expensive than occurrence based policies could be a recent Retro-Date of the policy.  A retro-date is usually established as the first effective date of your first claims-made policy.  If an incident or occurrence occurs prior to the established retro-date on a claims-made policy, there is no coverage for bodily injury or property damage claims.  If your retro-date is less than one, two or three years old, your insurance carrier typically is providing a discounted premium because there is a limited amount of your products in the market place. However, once your retro-date is over three, four, or five years old, the insurance carrier may see each additional year of your policy as another year of products being added to the market place and a higher probability that more incidences or occurrences will occur involving your products.  At this point your policy may start to equal or exceed the premium of an occurrence based policy.  Get six, seven or eight years into a claims-made policy and your premiums could be much higher than a comparable occurrence based policy. You also may find it impossible to switch policies because no other insurance carriers will pick-up the retro-date of your policy. 

So the moral to this blog is – when you first buy a claims-made policy the premiums will be cheaper than a comparable occurrence based policy; however, the longer you own a claims-made policy, the more likely your premium is going to increase and eventually be higher than an occurrence based policy.

Also, it is of critical importance not to lose the retro-date of your claims-made policy by letting your policy lapse or when you are changing policies because you will lose all of your coverage for any incidences or occurrences involving your products.  Any good risk manager will tell you that you should never assume just because you have never had any claims, it does not mean you do not have any incidences or occurrences involving your products.

A Better Understanding of Claims-Made Policies

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In many industries that sell high hazard products such as medical and children’s products, claims-made policy forms are very common. However, it is important to note that not all claims made forms are created equal.  There are two distinct types of claims-made policy forms.  One of the policy forms is the “Claims-Made & Reported Form” and the other is the “pure Claims-Made Form.”

The most common form used for product liability policies is the Claims-Made & Reported Form.  This type of policy requires the “claim” be made during the policy or the designated Extended Reporting Period (ERP) and reported in the same policy period of the policy currently in force.  On the policy declaration (summary) page it may state: “This is a Claims-Made Policy. This Policy only covers those Claims first made and reported against the insured during the Policy Period or “ERP”, if applicable.”

The second type of Claims-Made Policy form and least commonly used is the “Pure Claims-Made Form.  With this type of policy form the insured only needs to report the claim “as soon as practicable.”  This policy form provides more flexibility because the phrase “as soon as practicable” provides more flexibility and may allow claims to be turned in after the policy term.

What Is A Claim?

Hence the name Claims-Made, it is important to understand what constitutes a claim.  Is a claim a notice received by the insured to hold the insured responsible for bodily injury, property damage, advertising injury or personal injury or is it the formal service of lawsuit or institution of arbitration proceedings against the insured?  The answer could be both. I recommend that you examine the “Notice of Claim” reporting provisions of the policy or the “Definitions” section of your policy to understand what constitutes a claim by your insurance carrier.  Please note that a notice could be something as simple and informal as an email or a letter from the alleged injured party or it could be something as formal as being served with lawsuit papers.  This is why it is important you understand the definition of a claim within your policy.

The recommended simple rule for any insured with a claims-made policy is to always report any claim or potential circumstance that could lead to a claim for the insurance carrier.   All too often, when an insured fails to report a notice of claim, it is out of fear that the claim could have a negative impact on future premiums and, as a result, the insured waits, hoping that the notice never turns into a formal claim.  If the definition of a claim is notice (remember this could be a simple email) or threat to hold the insured for bodily injury, property damage or personal and advertising injury and you renew your insurance policy and fail to notify the insurance underwriter in the renewal application of knowledge of potential claim, this could be a reason for your the insurance carrier to deny a claim.  The insurance carrier could claim they would never have renewed the policy, if they had been aware of the potential claim or claims.

If you were to go out of business or the insurance carrier decides to non-renew or cancel the policy, it would be wise for you to purchase the Extended Reporting Period, particularly if you sell high hazard products.  ERP is a period of one, two or three years the insured can extend the reporting period of potential claims on their policy for an additional premium that is a contractually predetermined percentage of the premium of the last policy. In many claims-made policies the ERP for one year is 100%, two years is 150% and for three years it is 200% of the last premium paid.