March 19, 2009 by Christopher J. Boggs, CPCU, ARM, ALCM
One of two coverage “trigger” forms is used to provide liability protection: the “occurrence form” or the “claims made” form. There is no difference in the breadth of coverage provided by either form, the difference lies in what “triggers” the policy to respond – the occurrence of injury or damage or a claim (as defined by the policy) arising out of the injury or damage.
Agents and insureds are likely more familiar with the occurrence version of the form. Until the mid-60’s the “claims made” wording didn’t exist; and even into the early-to-mid 70’s its use was sporadic. Today the occurrence form remains the dominate form except for most professional and executive liability exposures where “claims made” policies rule. On occasion, a “claims made” form may be found insuring an unusual risk or “high” risk class of business (its use is more common in “non-standard” policies).
“Occurrence,” “Occurrence” Forms and Legal Theories
The term “occurrence” relates to the injury itself. When did the injury “occur?” Once the date of “occurrence” is established insureds know which policy(ies) responds to the incident. Simply put, the policy(ies) in effect when the injury “occurs” defends and/or pays the loss.
Different legal theories are used to determine the date(s) of “occurrence.” Courts apply four legal theories to identify when bodily injury or property damage occurs. And each jurisdiction looks to its own case law and legal precedent to decide which of these theories pertain in a particular incident:
1. The “Injury-in-Fact Theory “: Courts subscribing to this theory consider the date of ANY ACTUAL injury/damage (the day the nail was driven into the electrical wire) as the date of the “occurrence,” regardless of the discovery or manifestation of the injury;
2. The “Manifestation Theory “: The date the injury becomes EVIDENT is the date of the “occurrence” (i.e. the day the fire starts because of the nail in the wire). This theory is applied by the majority of states;
3. The “Exposure Theory “: Courts consider the dates of exposure to be the dates of the “occurrence” (multiple policy potential); or
4. The “Continuous Trigger Theory “: This is also known as the “triple-trigger” theory; multiple occurrence dates (and thus multiple policies) may be involved based on:
a) the date of first exposure,
b) the dates of continuous exposure, and
c) the date of manifestation.
The “Exposure Theory” and the “Continuous Trigger Theory” generally applies to pollution and like claims with longer exposure and manifestation periods. Asbestos and similar injuries and claims are examples of the use of these injury theories.
Several occurrence-based policies may be required to respond to one claim of bodily injury or property damage depending on which theory is applied the potential exists that. Claims involving long “gestation” periods (long time spans between the initial act or error and the ultimate result) are most likely to involve several policy periods.
Professional malpractice (of all types) and pollution injuries are two prime examples. An incorrectly performed medical procedure, building design
or an underground pollution leak may not manifest in actual injury or damage for several years. If the jurisdiction applies the “Manifestation Theory,” only the policy in effect when the injury or damage becomes evident will be required to respond in defense and/or payment of the claim. If, however, the “Continuous Trigger Theory” is applied, all policies from the date of the procedure, design or release until the actual evidence of harm will be called on to pay for the injury.
In an effort to eliminate the uncertainty of which and how many policies will be involved and pulled into these “long-tail” losses, the insurance industry introduced the “claims made” policy. With a “claims made” form, coverage is triggered by the claim itself. Again, simply stated, the policy in effect when the claim is brought defends and/or pays the loss.
“Claims Made” Differences
Unlike an occurrence-based policy, where only the date of occurrence must be determined (or occurrences – based on the legal theory applied), three dates must be known and/or determined to trigger coverage in a “claims made” form. These essential dates are:
1. The Date of Occurrence;
2. The Retroactive Date (or prior and pending litigation date); and
3. The Date the “Claim” is Made.
The date of occurrence has already been discussed and the date the claim is made might be considered self-evident (even though there is some doubt about what constitutes a “claim” and when it is made); thus only the term “retroactive date” necessitates further explanation.
A retroactive date acts as a limiting provision in the “claims made” policy. If the injury or damage occurs BEFORE this date – the policy will not respond to the loss. If, however, covered injury or damage occurs AFTER the retroactive date, the policy in effect when the claim is made will respond to defend and/or pay the claim.
For example, a policy has a January 1, 2004, retroactive date and the injury is determined to have occurred on November 1, 2003. The claim (as defined by the policy) arising from the occurrence is made on February 1, 2004. In this example, the policy in effect on February 1, 2004, will NOT pay for or defend the injury because the occurrence/injury took place before the retroactive date. Worse, the prior policy may not pay the loss if it was also a “claims made” policy whose retro date was advanced (not covered in this article).
Continuing the above simplified example, if the retroactive date were January 1, 2003, the policy in effect on February 1, 2004, (when the claim is made) would respond in defense or payment of the injury. Both examples are overly simplified, but they should make clear the importance of the retroactive date and its effect on coverage availability.
Tomorrow’s post details the coverage problems created when an insured moves from one coverage trigger form to another. Movement from an “occurrence” to a “claims made” form creates a different coverage issue than that created if the insured goes the other direction (from “claims made” to “occurrence”).