Chapter Thirteen

• Jurisdiction: New York

Chapter Thirteen

Claims-Made Policy Coverage Issues

Martin A. Lynn, Esq. Patricia A. Lynn-Ford, Esq.*

* This chapter was previously updated by James G. Eberz, Esq.

I. Introduction

Claims-made insurance policies provide coverage when a claim is made during the policy period. Occurrence policies provide coverage if the “occurrence” was during the policy period. The policy period is clearly identified in insurance policies. Many attorneys are not familiar with issues involving claims-made insurance policies. The distinction between coverage offered by claims-made and occurrence insurance policies is significant, and gives rise to many coverage issues.

The Department of Financial Services “finds that claims-made coverage tends to provide less protection than occurrence coverage, that claims-made coverage compared to occurrence coverage is a more complicated and confusing method of coverage that can create potential coverage gaps and that, on balance, across-the-board application of the claims-made policy form for all types of liability coverages would be an unwarranted and inappropriate change in the traditional insurance system and, therefore, not in the public interest.”¹⁵⁴⁴

Title 11 of the N.Y. Comp. Codes R. & Regs., § 73.0 (Insurance), the Preamble to Regulation 121, prescribes certain minimal standards for claims-made policies. As shown in the excerpt above, the Department has indicated that troubles can occur with the use of claims-made policies. By its terms, Title 11 limits claims made coverage to certain types of professional and commercial liability policies, as further discussed below.

II. Statute and Regulations

The language found in N.Y. Insurance Law § 3420¹⁵⁴⁵ (Insurance Law) provides the minimal requirements of liability insurance policies. Section 3420 itself does not make any distinction between occurrence-based policies and claims-made policies. The specific requirements for coverage under claims-made insurance policies are set forth in 11 N.Y.C.R.R. § 73.0, et seq.

Section 73.2 authorizes claims-made polices for 12 specific lines of insurance: (1) completed operations liability; (2) directors and officers liability; (3) employee benefits liability; (4) errors and omissions liability; (5) excess liability; (6) fiduciary liability; (7) pollution and environmental impairment liability; (8) public entity liability; (9) products liability; (10) professional liability (including medical malpractice liability); (11) ski resort liability, subject to subdivision (f) of this section; (12) employment practices liability; and (13) risks specified in paragraph (d)(1) of this section.¹⁵⁴⁶ 11 N.Y.C.R.R. §73.2(d) provides as follows:

(d) (1) A liability policy may be issued or renewed in this State on a claims-made basis if the policy:

(i) insures a large commercial insured;

(ii) provides primary coverage of at least $5,000,000 per occurrence;

(iii) provides umbrella or excess coverage of at least $1,000,000 per occurrence, where the underlying limits are at least $2,000,000 per occurrence; or

(iv) is written with a deductible, or over a self-insured retention, of at least $100,000 per occurrence.

(2) Any policy issued or renewed pursuant to this subdivision must comply with all the provisions of this Part, except:

(i) subdivisions (e)(1), (e)(3)(ii), (f), (h)(1), (2) and (4), and (n) of section 73.3 of this Part;

(ii) subdivisions (a)(5), (b) and (c) of section 73.7 of this Part; and

(iii) section 73.8 of this Part.

Those lines most familiar to practicing attorneys are those providing coverage for errors and omissions liability, professional liability and products liability insurance policies. Claims-made coverage is limited to certain commercial and professional liability coverage for two reasons: (1) presumably, the purchaser is more sophisticated; and (2) availability of coverage has been a problem in the past.¹⁵⁴⁷

The primary purpose of claims-made coverage regulations are (1) providing notice in the policy to the buyer that “different” notice and reporting provisions apply; and (2) detailing the requirements for extending the period for reporting claims (ERP or “tail” coverage), which must be offered at the end of the policy period.¹⁵⁴⁸

To protect insureds, the regulations impose minimum standards on claims-made policies,¹⁵⁴⁹ and provide for mandatory extended reporting periods.¹⁵⁵⁰ Section 73.3(c)(1) requires that the issuing insurer on a claims-made policy must make ERP coverage available upon termination of coverage under the policy.¹⁵⁵¹ Such coverage creates an additional period of time for the reporting of claims made during the ERP period.

There are exceptions to the ERP coverage requirements. Where the insurers are foreign entities not licensed to do business in New York State, and the insurance is instead procured through an entity that is an authorized excess surplus lines holder, the policy is valid, but it is not subject to the provisions of Regulation 121, and ERP is not required.¹⁵⁵²

In addition, where policies are subject to the exception set forth in § 73.2(d)(1), ERP need not be offered where the termination of coverage is at the behest of the insured, because the terms of coverage, i.e., limits, deductible, exclusion, etc., are less favorable than previously offered to the insured.¹⁵⁵³ The provision sets forth four criteria, any one of which allows the exception to ERP coverage. These requirements are: (i) they insure a large commercial insured as defined by § 73.1(g); (ii) they provide primary coverage of at least $5 million per occurrence; (iii) they provide excess coverage of at least $1 million per occurrence; or, (iv) they have a deductible of at least $100,000 per occurrence.¹⁵⁵⁴

III. Definitions

An “occurrence” policy is an insurance agreement that provides benefits when the event giving rise to the claim occurred during the time that particular policy was in force. Coverage is afforded regardless of when the claim is made; it can be many years after the events that produced the claim.¹⁵⁵⁵

A “claims-made” policy is an insurance agreement that provides benefits when the claim is first made during the time that policy was in force. By definition, a claim that is first made is covered only by the then-current insurance policy.¹⁵⁵⁶ The claim must be both made against the insured and reported by the insured to its insurer within...