Is it occurring or is it made?

Understanding the difference between 'Losses Occurring' and 'Claims Made' liability policy wordings is crucial for brokers to ensure their clients are correctly covered.

Before we get into the differences, it is crucial to realise that the claims reporting requirements for all legal liability policy wordings are basically the same. The Insured must notify the Insurer of each and every event that could or may result in a claim in terms of the policy. The claim could be made this year, next year or never, but the policy wording requires notification as soon as possible after an event.

Losses Occurring

Since the early 1800s the General Liability operative clause read 'occurring within the Territorial Limits and during the Period of Insurance of this Policy, in the course of or in connection with the Insured's Business'. This means that as long as the event that causes the injury or damage has its proximate cause during the policy period of insurance, that policy will respond.

Let's look at an example. In 1965, XYZ Insurance Company issued a General Public Liability policy for MNO Manufacturing who made ironing board iron stands out of pressed asbestos. The policy is renewed every year for 10 years till MNO stopped production due to asbestos being proved to be harmful to the environment and humans.

XYZ Ins. Co. still exists today, while MNO Manufacturing has been taken over by JKL Manufacturing. In 2008, JKL receives a lawyer's letter claiming compensation of R10 million for Mr J Smith, who has been diagnosed with 'Asbestosis'. The claim states that Mr Smith lived in the residential suburb next to MNO Manufacturing's factory during the years 1960 to 1980.

Proximate cause

Since 1985 Mr. Smith has suffered bad coughing and shortness of breath. A recent X-ray has proved that he is suffering from Asbestosis which, after investigation, he could only have contracted whilst living close to MNO's factory.

Omitting the possible defences available to XYZ Ins. Co. on behalf of JKL Manufacturing, the policy issued by XYZ from 1965 onwards may have to provide compensation. This would be the case if it can be proved that the proximate cause of Mr Smith's condition goes back to when he lived close to MNO's factory.

Pros and cons

Until the mid 1980s all Public Liability policy wordings allowed costs to be recovered 'in addition' to the Limit of Indemnity. In South Africa this is not a major issue, but when looking at the legal fees and costs in the USA, UK and Europe, legal costs can be astronomical.

The main disadvantage of a 'Losses Occurring' wording is that it fails to keep pace with inflation since the policy(ies) in force at the time of the proximate cause were issued with, what we consider today, a very low Limit of Indemnity.

The only advantage to a 'Losses Occurring' wording is that the risk of a claim is never ending, referred to as the 'long tail' risk. The Insurer is on risk forever. The historic problem with this was that Insurers did not reserve anything for possible claims 50 years after expiry of cover.

Claims Made

Since the mid 1980s, following major 'Losses Occurring' liability policy claims, Lloyd's and the professional reinsurance markets insisted that liability policy wordings be issued on a 'Claims Made' basis. In addition, they required that the Limit of Indemnity includes all legal fees and expenses.

This means that any claim lodged against the Insured will be attended to by the wording existing at the time the Insured receives written notification from the third party.

Handling long tail claims

Legal liability cases do not manifest themselves instantly,like fires causing loss or damage. The Asbestosis claim started sometime in the 1960s, but only developed into a legal liability claim 30 to 40 years later. So how does the Claims Made wording handle this?

The operative clause of the Claims Made wording states "occurring within the Territorial Limits on or after the Retroactive Date stated on the Schedule, in the course of or in connection with the Insured's Business and which results in a claim or claims first being made against the Insured during the Period of Insurance of this Policy".

This means that as long as the event that causes the injury or damage has its proximate cause after the Retroactive Date and the claim is lodged against the insured, in writing, during the policy period of insurance, that policy will respond.

Beware the phrases

There are two important phrases used in the Claims Made wording that are not, for obvious reasons, included in the Losses Occurring wording. The term Retroactive Date means that the activity that goes back to a stated date and the proximate cause must occur any time after this date.

The second phrase is "claim in writing" – the Insurers need to know that a claim has actually been made and the most obvious way to record this is in writing from the third party.

Going back to the claim by Mr Smith, let's say that in 1965 onwards, the XYZ Ins. Co. issued a Claims Made wording. We must also presume that the liability policy issued for 2008 is also on a Claims Made basis with a Retroactive Date in 1965. The claim would not be handled by the 1965 + policies but by the 2008 policy wording. This means that the limit and extensions applicable in 2008 will apply to the claim.

Pros and cons

The advantage of a Claims Made liability policy wording is that it keeps pace with inflation and new trends in coverage. The limit of liability should never be less than the costs of discussions with lawyers, advocates and up to 10 days in court, let alone the value of any third party claim. No liability policy should be issued for less than a R10 million limit.

The disadvantage of a Claims Made policy wording is only applicable if the Retroactive Date is not ascertained properly. So how do you arrive at an adequate Retroactive Date? I have heard of one going back over 100 years, but most go back between 10 to 15 years.

Retroactive Date

Since the Losses Occurring wording takes care of all claims made with the proximate cause date/period during the Losses Occurring periods of insurance, the Retroactive Date need only go back to when the last Losses Occurring policy expired.

PI exposures

One of the most important PI exposures for Intermediaries is their failure to ascertain the correct Retroactive Date.

Any claims that have their proximate cause during this five year hole are for the Intermediary's account as a PI exposure. I think we all know 'Murphy'.

Insurers are not eager to allow a Retroactive Date to go back too far, but this is not the Intermediaries concern. Intermediaries must make sure that they do not 'dig a hole' for themselves.

The future

Looking forward, will there be a need for a Claims Made wording including a Retroactive Date? Do the maths and see if you agree with me that after 2020 the need is likely to fall away.