Claims-made policies: insights for brokers
Navigating the complexities of professional indemnity (PI) insurance requires a clear understanding of the distinct differences between claims-made and loss-occurrence policies.
Brokers play a key role in navigating the nuances of claims-made and loss-occurrence policies, ensuring they provide the most appropriate coverage to their clients.
We spoke with Sandra Sithole, Partner, Rethabile Shabalala, Senior Associate, and Maano Manavhela, Associate at Webber Wentzel to gather expert insights that can further support brokers in refining their risk management strategies and navigating the intricacies of claims-made policies.
Claims-made vs. loss-occurrence policies
At the core of every PI policy lies the distinction between claims-made and loss-occurrence coverage. The fundamental difference, according to Webber Wentzel, is how and when coverage responds to claims. A loss-occurrence policy responds to losses that occur during the policy period, irrespective of when the claim is made. This means that if the negligent act or omission leading to the loss happens while the policy is in effect, the insured can claim indemnity, even if the claim arises years later.
Webber Wentzel explains that “a claims-made policy, by contrast, responds to claims first made against the insured during the policy period or, in many wordings, during the policy period and any applicable extended reporting period. It is the timing of the claim, not the timing of the underlying act, error, or omission that determines which policy year is engaged.”
This distinction is significant for brokers and insured professionals. Under a claims-made policy, if the insured changes insurers or experiences a lapse in coverage, there is a risk that claims related to prior work may fall into a coverage gap. “The original policy has expired, and the new policy may exclude known or prior matters.” Brokers and insureds must, therefore, be vigilant in ensuring continuity of cover and understanding the specific terms of their policies, including retroactive date provisions and the requirement to notify insurers of circumstances that could give rise to a claim.
Identifying circumstances that could lead to a claim
One of the most important aspects of managing professional risk is proactively identifying potential claims before they formalise. For brokers, this means staying alert to situations that could escalate into a claim, and for professionals covered by PI insurance, it’s essential to recognise these early warning signs. Webber Wentzel highlights that “implementing regular file reviews and internal audits to identify errors, omissions, or areas of client dissatisfaction before they escalate” is a valuable strategy. A proactive approach helps mitigate risk by identifying potential issues early on.
The firm recommends that professionals foster a culture where employees feel comfortable raising concerns about possible issues without fear of blame. “Many companies find it helpful to maintain a 'circumstances register', a centralised log of matters that may not yet have manifested into formal claims, but which warrant monitoring and, potentially, notification to insurers.” This type of register allows for ongoing awareness of situations that could later lead to a claim, enabling early action and mitigating potential exposure.
Confidentiality concerns can sometimes make policyholders hesitant to notify their insurers of these circumstances. However, Webber Wentzel advises that policyholders “disclose as much information as reasonably possible to their insurers, while carefully avoiding the disclosure of confidential, privileged, or commercially sensitive information, or information which they are not legally or contractually permitted to place in the public domain.” For situations where sensitive information is involved, the firm suggests making disclosures subject to confidentiality or non-disclosure agreements to ensure compliance without violating confidentiality obligations.
Meeting notification obligations effectively
Brokers are advised to be thoroughly familiar with their policy's notification obligations to ensure clients receive the full protection available under professional indemnity cover. Webber Wentzel offers several practical strategies for brokers to meet these obligations, such as implementing regular internal audits and fostering a risk-aware culture within teams. “Notification should be treated as a routine discipline rather than a reactive measure,” the firm advises.
By treating notification as part of the ongoing risk management process, brokers can avoid common pitfalls, particularly the delay until a formal claim is made. Regularly reviewing client communications and reviewing policy documents for changes in wording or exclusions is essential. Webber Wentzel cautions against relying on post-expiry grace periods, advising brokers to notify insurers at the first sign of potential issues, even if those issues have not yet developed into formal claims.
Utilising deeming provisions in claims-made policies
Deeming provisions are an often underutilised yet critical tool for managing claims-made policies. These provisions allow circumstances reported during a policy period to be considered a claim under the same period, even if no formal claim has yet materialised. Webber Wentzel emphasises that “if a broker becomes aware of a dissatisfied client, a potential error, or any situation that could give rise to a claim, notifying the PI insurer before the policy expires effectively 'locks in' that year’s cover.”
The significance of this approach is underscored by the firm’s reference to the Cross Point Brokers case, which demonstrated how timely notification under a deeming provision could have attached a claim to the 2020 policy, preventing exposure to new exclusions that were introduced at renewal. “The lesson for brokers is straightforward: treat deeming provisions as a proactive risk management tool.”
Webber Wentzel advises brokers to act as soon as circumstances arise that could lead to a claim, even before a formal claim is made. “Notify the insurer in writing with full particulars. This simple step can be the difference between full indemnity and no cover at all.”
Best practices for brokers
While understanding professional indemnity insurance is essential, integrating this knowledge into daily risk management practices is equally important. Webber Wentzel suggests brokers begin by “ensuring they are thoroughly familiar with the mechanics of their own PI policies, including how claims-made cover is triggered, what the retroactive date means in practice, and what the policy's notification conditions require.”
Additionally, brokers should maintain a live circumstance register, updating it with client concerns or issues that could lead to future claims. “Notification should be treated as a routine discipline rather than a reactive measure.” By adopting these proactive risk management practices, brokers will be better equipped to manage their own professional risks and offer better advice to clients.
Emerging trends in PI cover
Brokers should also be aware of emerging trends and developments in the PI insurance landscape. One significant trend is the introduction of pandemic and infectious disease exclusions in PI policies. The Cross Point Brokers case serves as a stark reminder that “policy renewal creates a new contract and does not carry over rights from the preceding one.” Brokers must treat each renewal as a new contract and carefully scrutinise any changes in policy wordings, particularly regarding exclusions.
With the evolution of PI policies to address new and systemic risks - such as pandemics, cyber threats, and regulatory changes - Webber Wentzel advises brokers to seek specialist input at renewal and stay informed about the latest market developments. “Brokers would do well to stay abreast of market developments through industry publications and professional development forums.”
General guidance for brokers
Webber Wentzel offers the following insight for brokers: “A claims-made policy affords indemnity based on when a claim is made, not when the underlying act or omission occurred. Grasping this distinction is the starting point for any broker seeking to make the most of the protections available. Brokers should read their policy schedules and conditions at inception and at every renewal, paying particular attention to the period of insurance, the retroactive date, claims conditions, and any exclusions. The goal is to understand not just what the policy covers, but the precise conditions that must be met for cover to attach.”
“Brokers should invest in ongoing professional development around PI liability and make a habit of staying current with market developments through industry publications and professional development forums. Building this knowledge base over time equips brokers to identify gaps in cover before they become problems, to have more informed conversations with insurers and clients alike, and to navigate the increasingly complex PI landscape with greater confidence. Ultimately, the brokers who are best protected are those who treat their own PI cover with the same diligence and attention to detail that they apply to their clients’ risks."
Writer’s Thoughts
Staying proactive in managing professional indemnity cover helps brokers navigate the complexities of evolving risks and ensures they can offer well-informed advice to their clients. By integrating these best practices and staying attuned to industry developments, brokers are better positioned to adapt to changes in the insurance landscape and continue providing valuable service. Please comment below, interact with us on X at @fanews_online or email me your thoughts.
