Be Careful When Changing Business Insurance Policies
Switching between insurance policies may result in coverage gaps, and failing to report claims may preclude a defense and coverage.
Changing insurance policies without careful consideration can be hazardous to your bottom line. When changing policies, you need to evaluate more than just the premium expense; instead, you must understand what type of policy you have and carefully review its language and your needs so you do not inadvertently leave claims uncovered.
Most commercial general liability policies purchased by small business owners are “occurrence” policies, meaning the policy will insure a covered event that occurred during the policy period, regardless of when the claim is reported to the insurer. These policies are fairly straightforward. Even if a claim arises after an occurrence policy has expired, the policy that was in effect during that occurrence generally will still be on the hook. With occurrence policies, changing to a new policy with a different insurer presents fewer risks.
These days, however, most employment practices and professional liability policies (such as errors and omissions and directors and officers coverage), are “claims-made” instead of occurrence policies. These will ordinarily state that they are claims made or “claims made and reported” on the declarations page or the first page of the policy.
Claims-made policies have a greater potential for coverage gaps when changing policies, as well as other hazards that arise from not fully understanding the terms. These types of policies ordinarily cover only a claim for damages first made against an insured during the policy period or perhaps a short period afterward, depending on the precise policy language. The insurer’s coverage obligation may be triggered on the date the insured first became aware of the possibility of a claim. The failure to report this “claim” to the insurer during a policy term may result in having no defense or coverage for a subsequent lawsuit, a risk that is particularly heightened when you have changed insurance policies.
In addition, what constitutes a “claim” that should immediately be reported to the insurer varies significantly depending on the terms of the policy. A claim may occur when the insured receives some type of communication that is something less than a lawsuit. Many policies define “claim” broadly to include a verbal or written demand for money or non-monetary damages, including an administrative proceeding or even an employee’s internal complaint.
Not knowing when or what to do when a “claim” arises can lead to having no defense or coverage for subsequent litigation. Some policies allow insureds to try to protect themselves by reporting any incidents or circumstances that occur during the policy that may lead to a future claim. With this type of policy, if an incident is reported and litigation later results, a higher probability exists of being provided with defense and coverage.
This article is a brief caution; a full discussion of these issues could fill a book. Just be aware that switching between insurance policies may result in coverage gaps, and failing to report claims may also preclude a defense and coverage. Therefore, be careful and consult your insurance professional and/or lawyer if you would like a better understanding.