Suppose the Insured committed a wrongful act on 1 Feb 2008 but only became aware of the wrong two years later on 1 Feb 2010 when the legal papers arrived. Would the claim be paid if the cover started on 1 Jan 2010 and ran for the whole of 2010?
Liability insurance is written on either a Losses-Occurring basis or (more commonly) on a Claims-Made basis.
- If the policy was written on a Losses-Occurring basis then the injury or damage needs to have occurred during the policy period. In the example the damage was done during 2008 so the claim would not be covered.
- If the policy is written on a Claims-Made basis then the policy needs to be in force at the time the Insured finds out that there is possible claim. Although the Insured became aware of the claim (and reported it to the Insurer) during the Period of Insurance, the event giving rise to the claim could have occurred before the Period of Insurance started.
Will the Claims-Made policy always pay for damage done prior to (but notified of during) the Period of Insurance? Not necessarily, damage done prior to the Retroactive Date (stated in the policy) is not covered. Also, it is important that the Insured was not aware of a possible claim before the inception of the policy. It is important that, prior to the renewal of a Claims-Made policy, the Insured must ensure that the Insurer is made aware of any possible claims.