By Gail Myers, CPCU, RCM&D Claim Manager
Claims-made policies have been around since the 1980s, but policyholders still do not always understand the reporting requirements thoroughly. That lack of knowledge can have serious ramifications when they send suit papers to their insurance carrier and instead of getting the protection they expect, they receive a letter from the carrier disclaiming coverage for the claim.
Unlike an occurrence policy, where the policy in force at the time of the loss triggers coverage, the coverage under claims-made and reported policies is triggered by the date you first became aware and notify the insurer of a claim or potential claim. The necessity of following the precise notification procedures for claims and potential claims is what often causes the problem for policyholders – failure to properly provide notification to the insurer will eliminate coverage.
The following example shows how this can be a problem.
- Assume that the policyholder has a claims-made and reported policy with effective dates of 1/1/05-06. They receive an Equal Employment Opportunity Commission (EEOC) complaint in March 2005. The complaint results in no decision by the EEOC and the claimant is given a right to sue letter. The claimant files suit in April 2006 and the policyholder submits the claim to the carrier. The 05/06 insurer will deny coverage to the policyholder because they breached the notification requirements---the policyholder was aware of the claim in March 2005 and did not report it. The 06/07 policy will likewise deny coverage since the claim was made in the prior policy year. This holds true even if there was no change in insurance carriers between 05/06 and 06/07 policy years.
Why was this reporting error made?
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Policyholders many times do not think of an EEOC complaint as a “claim.” It is not until suit is filed that they begin to think about insurance. The definition of “claim” in the policy however, includes any administrative or regulatory investigation when conducted by the Equal Employment Opportunity Commission or similar state or local agencies, which is commenced by the filing of a notice of charges.
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The organizational structure of the insured entity can facilitate this type of error.
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Many times EEOC complaints are sent to the Human Resources department and handled from that part of the organization. The risk management department, which is responsible for notifying the insurance company of any potential claims, does not have any idea that an EEOC complaint has even been made. They become aware of the claim when suit is filed and by then, they are not in compliance with conditions of the policy.
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A decentralized organization with locations around the region or country can face this same issue. If the local site receives the EEOC complaint rather than the headquarters and they handle the complaint locally, the risk manager for the organization may never know of the complaint. It does not matter that the risk manager was unaware of the complaint; the “insured” was aware (even though this is not anyone responsible for insurance), and did not report the claim to the carrier when they became aware of the claim.
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What can you do to minimize the risks of breaching your notification conditions in the policy?
- Educate yourself on the specific reporting requirements in your policy. Strictly comply with these requirements.
- Open the lines of communication between the HR department and the risk manager (or whoever is responsible for reporting claims to the carrier). Make sure the HR director is aware of the importance of notifying the risk manager whenever an EEOC claim is received.
- Educate local offices of the importance of notifying the risk manager of any EEOC complaints.
- Report anything that has the potential for turning into a claim. Many claims-made policies include a provision that allows you to notify them of a potential claim and if that incident turns into an actual claim later (after expiration of the policy), it will still be considered a claim under their policy.
For more information on claims- made vs. occurrence policy forms, please contact the RCM&D Consultative Claims or Risk Control Department.
Your continuing effort is essential to accident prevention, regulatory compliance and control of risks in your workplace. Our assistance may be used as adjunct in certain areas of that effort, but we assume and have no responsibility to you or others for the control or correction of conditions or practices existing at your premises. Further, we do not warrant that the completion of any recommendation in this document will assure that the premises or operations are safe or healthful, or are in compliance with any law, regulation, code or standard.
