There are a number of risks which, because of the nature of their business, are placed into a claims-made policy instead of a traditional occurrence policy. Many Professional Liability policies – including Errors & Omissions policies – are written on a claims-made basis. Some types of manufacturing risks are also written on a claims-made policy, so an underwriter has a better feel for a risk from year to year. Retro dates are an important consideration when a claims-made policy is written.
We have seen claims where it was apparent that neither the agent nor the claimant understood retro dates, and claims against the agent followed. Two key trigger points in any claims-made policy are the “wrongful act” date and the date the claim is made. A claims-made policy only covers claims made during the policy period, which includes an extended reporting period if the policy is terminated. That concept is easy to follow – although there are some provisions for an insured to lock in a date a claim is made by reporting facts or circumstances that could result in a claim to the carrier during the policy period.
Have a Working Knowledge
A “wrongful act” is a defined term in a claims-made policy. It is the act, error or omission an insured commits that ultimately gives rise to a claim. For a professional, using a doctor as an example, that would be the date the doctor misdiagnoses a patient’s malady or the date the doctor errs while performing surgery. For a manufacturer, the wrongful act date would be when a defective product was manufactured.
Retro dates on a claims-made policy are directly tied into wrongful act dates. If a risk has a retroactive date listed on the policy, there is no coverage for any wrongful act that occurred prior to the retro date. If the policy states “none” for a retro date, all prior wrongful acts are covered – no matter when they occurred. Ideally (and if possible), a client with a claims-made policy should have no retro date listed. Yet that is not always possible, and the decision to accept a risk with no retro date rests with the underwriter.
If a client has policy with a retro date listed, the agent must make the client aware of the meaning and significance of it. If an agent moves a client from one claims-made policy to another and the newer policy has a retro date that is the same as the inception date of the newer policy, the agent should advise the client of the change in retro dates and tell them that a “tail” can be purchased from the old carrier (which had an earlier retro date) to cover themselves if claims arise from earlier wrongful acts. “Tail” coverage can be purchased anywhere from one year up to ten years from a prior carrier.
If an agent does not have a working knowledge of the basic rules of wrongful act dates, retro dates and “tail” coverage, mistakes will occur and claims will be made.
The Claim Against the Agent was Settled for …
For example, an agent switched claims-made carriers for a saw manufacturer. The old claims-made policy had a three-year retro date (to three years back from the inception date), while the new policy only had a one-year retro date. The agent thought a one-year retro was better than a three-year retro, and never discussed with the client the option of purchasing a “tail” from the prior carrier.
The client was sued by a man (during the new policy term) who was severely injured while using a saw, rendering his dominant arm useless. The saw was manufactured two years prior to the new policy’s inception date. The new carrier disclaimed coverage because the wrongful act date was prior to the one-year retro date. The old carrier denied coverage because the claim was not made within the policy term. The client sued the agent. The claim against the agent was settled for $335,000.
Another example is a case where the agent’s client was an engineering firm. The agent switched carriers from a policy that had no retro date to a policy that had a seven-year retro date. The firm had worked on a silo that collapsed, and the agent was aware of the collapse, which occurred 8 years after the silo had been worked on by the client. During the term of the old claims-made policy, the client conferred with the agent and they decided, because no claim had been made at that time, not to report the potential loss to the old carrier.
When a claim was made during the term with the new carrier, the loss was reported
to that carrier, which denied coverage because the wrongful act occurred before the seven-year retro date. The client paid $300,000 to settle the claim against them and sued the agent, alleging the agent knew when the silo had been worked on by the client – and that the agent should have reported the loss as a potential claim to the old carrier during that policy term or obtained an earlier retro date with the new carrier. The case against the agent was settled for $135,000.
Discuss and Understand
An agent selling claims-made policies unaware of the ramifications of retro dates and not discussing those issues with the client when coverage is being procured is inviting a lawsuit. Protect the agency’s interests by fully discussing and fully understanding the importance of retro dates with your clients.
Paul E. Walters is a claims manager in the Errors & Omissions Department at Utica Mutual Insurance Co.
Claims-Made Policies: Agents, clients must understand retro dates via IFAwebnews .