Managing Your Risk
Occurrence-based liability policies offer greatest protection

By Michael Kelly
NCACC Risk Management

County liability insurance programs utilize two primary types of insurance policies – "occurrence-based" and "claims made." Not understanding the differences between the two can produce sizable and unnecessary expenses.

Risk managers trying to choose between the two types of policies face a significant challenge when they solicit bids for their county's property and casualty insurance coverage. A claims-made policy may initially appear to be less expensive than an occurrence-based policy, but there are significant reasons for this. Standard insurance carriers will routinely utilize claims-made policy language in order to limit their long-term exposure to loss, which inversely increases yours.

Occurrence-based policies cover losses that happen during a given period of time (the policy term) and essentially continue to do so forever. As long as the loss occurred during the policy term, even if discovered a decade or more later, the occurrence-based policy that was in force at that time of the loss will respond, providing legal defense and coverage according to the policy language at that time.

Conversely, claims-made coverage is designed so that the policy that will respond to trigger coverage is the policy that is in-force at the time the claim is made, regardless of when the actual loss happened. A traditional claims-made policy will have what is called a "retroactive date" that establishes how far back in time a loss can occur and still be covered. Normally the retroactive date is the first day of the first year an insurance carrier begins their period of coverage.

If you change to another insurance company in the future, the new insurance carrier will likely reset your retroactive date to the first day it took over as your county's new insurance carrier. It is possible the new carrier will be willing to set its retroactive date back earlier, depending upon the level of competition in the insurance market at that time.

It is a point of negotiation each time you change insurance companies. Since a claims-made policy has no guarantee of continued insurability, if you are canceled or voluntarily move to a different carrier, you may not have coverage in the future for activities in the past.

If the new carrier is unwilling to backdate its retroactive date to match the prior carrier's retroactive date, a gap in coverage may develop. One solution for this is to purchase what is commonly called an extended reporting option, or a "tail."

Tail coverage is purchased from the carrier that is not renewing the policy and extends the time a county has to report and cover losses that occurred in its original policy period. Purchasing the "tail" allows you to still report and have coverage under the expired policy for these unknown losses even though the loss was reported after the policy expired.

Tail coverage varies in both cost and length of time it is offered. The maximum premium charge is normally described in each policy and is typically 100 percent of the expiring policy's annual liability premium for each 12-month period of extended reporting capability.

This hidden additional cost is very difficult to negotiate with an insurance company that is losing a county's business. There is little incentive for them to price favorably, and it is normally quoted at the full 100 percent of annual premium cost. This additional fee is essentially the barb in the hook that makes changing from one claims-made policy to another often very difficult, as well as expensive. Unless you plan in advance, this additional cost is unknown at the beginning of the policy year, when there is still time to include it in your budget.

Some insurance carriers may offer "prior acts" coverage or something known as a "nose" in the insurance industry. Nose coverage is essentially the opposite of tail coverage in that it fulfills a similar need of addressing a gap, providing prior acts coverage for insureds that are usually migrating from a claims-made policy back to an occurrence-based policy. Normally it is provided by the new replacement insurance policy for a one-time additional charge based on a fraction of the annual liability premium.

Law Enforcement Liability, Employment Practice Liability and Public Officials Liability (also sometimes called Directors and Officers Liability) are often covered using claims-made policy forms. These routine county exposures can exhibit long-term, far-reaching liability issues. Using claims-made coverage limits the insurance carrier's exposure to loss and potentially increases yours. So what can a county risk manager do to address this?

The obvious solution to avoid the issues described is to seek and purchase these coverages through insurance markets that offer an occurrence-based policy form. There are in fact standard insurance markets that will do so. If your county is a member of the NCACC Liability & Property Pool, all of these described insurance lines are written on the occurrence-based policy form.

If you are not a member of the NCACC Liability & Property Pool and are unsure about your standard insurance carrier's policy, you can determine which applies to your county by reviewing the various policies for these three lines of coverage, noting the declaration page that lists the name of the insured, your address and the effective date. If you have a claims-made policy, the declaration page should exhibit clearly – often in red type – the following statement: "This is a Claims-Made Policy – Please Read Carefully."

Once you have confirmed that you are operating under a claims-made policy, delve further into the policy language to ascertain your retroactive date and the maximum cost for purchasing tail coverage should you ever decide to move to another carrier in the future.

The shorter the timeframe that your county has been insured under a claims-made policy form, the easier and less expensive it will be to migrate back to the more desirable, occurrence-based form. If it has been three years or less, you should be able to purchase nose coverage going back long enough to prevent any gaps.

In the future when seeking insurance bids, mandate in your bid specifications that these insurance lines are to be quoted and written on an occurrence-based policy. If the quoting carrier will not offer occurrence-based coverage, get in writing the quote to purchase the tail coverage up front and add that to your initial cost, as it is likely your county will make a change in coverage if underwritten through the standard markets – either being your choice or by force if your carrier decides to not offer a renewal. Their quote for the tail coverage will likely be less expensive up front if they believe there is a chance at that point to write your county's insurance.

Unfortunately, insurance coverage is one of those intangible products or services that is often purchased on the basis of price alone. Details of coverage (or lack thereof) often do not manifest themselves until an uncovered loss occurs, and by then it is too late. By taking a minute to review your county's insurance policies with the specifics of this information in mind, you could save thousands of dollars in the future.

Michael Kelly serves as Property and Casualty Program Specialist for the NCACC's Risk Management Pools. He writes a regular column on risk management for CountyLines.