What’s your claims made continuity plan?

Throughout the Covid-19 pandemic much discussion centred around business’ resilience to change, with particular focus on business continuity plans or “BCPs”. Businesses that were nimble and adaptable to the changes posed by the pandemic continued to operate and some even continued to grow and excel. So too in respect of “claims made” insurance, businesses should certainly have a continuity plan or as its more generally known in insurance, “continuous cover.” Further, “continuous cover” recently featured in the high-profile case of Zurich Australian Insurance Limited v CIMIC Group Limited & Ors which dealt with insurance issues surrounding Leighton’s alleged bribery in Iraq and the associated investigations and securities class actions that followed.

As noted in our article – Claims made insurance- a snapshot, policies written on a “claims made” basis require a policyholder to notify the policy in place at the time a policyholder first becomes aware of:

(a) facts and circumstances giving rise to a claim (“circumstances”); or

(b) receives a written demand for compensation alleging a wrongful act against it (“claim”).

As more fulsomely discussed in our article What is a Circumstance giving rise to a Claim? from 30 November 2021, a “circumstance” is ordinarily a situation which, objectively evaluated, creates a reasonable and appreciable belief that certain matters would give rise to or potentially result in a loss or claim being made against the policyholder.

If a policyholder fails to notify “circumstances” or a “claim” during the relevant policy period or the policy is not renewed and there is no “run-off cover” or “discovery period” in place, then there will be no cover even if the conduct giving rise to the claim happened during the policy period of any lapsed policy previously held by the policyholder. However, there are special rules under Section 54 of the Insurance Contracts Act which will require an insurer to honour coverage for a claim made during the insurer’s policy period subject to a reduction for any prejudice suffered by the insurer due to the late notification of the claim. This same rule does not usually require an insurer to honour late notified circumstances.

Moreover, any new or go forward “claims made” insurer will typically rely on a “prior known circumstances and claims” exclusion, which relieves an insurer from indemnifying a policyholder for any “circumstances” or “claims” that a policyholder knew about prior to the inception of a “claims made” policy. This exclusion is to prevent aggregation of indemnity limits across policy years, but more so, to prevent “moral risk” issues – specifically the purchase of insurance to cover a loss already known to exist.

So, what happens to an insured professional services business who becomes aware of circumstances that could give rise to a professional indemnity claim in policy year 1 with insurer A, but through omission fails to notify circumstances until policy year 2 with insurer A, when the circumstances ripen into a claim? What happens if the insured professional services business moved to insurer B in year 2?

In short, most “claims made” insurance policies will provide a “continuous cover” extension, which can obviate the harsh realities of a failure to timely notify “circumstances” to an insurer.

An example of continuous coverage extension wording is as follows:

a) In the event a Claim arises from circumstances that could or should have been notified on an earlier policy of which this Policy is a direct or indirect renewal or replacement, but was not notified for any reason other than as a result of fraudulent non-disclosure or fraudulent misrepresentation, the Insurer will treat the Claim as having been first made during the Policy Period, provided the Claim could and should have been notified after the applicable Continuity Date.

b) The “Prior Notice” exclusion shall not apply to facts, events, circumstances, Wrongful Acts, or Wrongful Breaches that could or should have been the subject of a notice given on an earlier policy of which this Policy is a direct or indirect renewal or replacement, provided that such facts, events, circumstances, Wrongful Acts or Wrongful Breaches: i) were not the subject of any notice given on any earlier policy of which this Policy is an indirect renewal or replacement; and ii) could and should have been notified after the applicable Continuity Date.

Any cover provided by this Extension will be subject to the terms, conditions, and limitations of the policy in place at the time such Claim or fact, event, circumstance, Wrongful Act or Wrongful Breach could and should have been notified, except where such policy provides broader cover than this Policy, in which case the terms, conditions and limitations of this Policy shall apply.

A typical way of obtaining the benefit of continuous coverage is to maintain insurance with the same “claims made” insurer year on year. Where there is uninterrupted coverage with the same insurer year on year, the continuity date will usually be, at a minimum, the date the first policy year incepted, if not earlier. Thus, the continuity date usually represents the date from which a policyholder has had uninterrupted coverage with the same insurer. This is often why strong consideration should be given to switching insurers under a “claims made” policy, given a new incoming insurer such as insurer B in the scenario will usually expect its continuity date to be at inception of the new policy and will also rely on the “prior known circumstances and claims” exclusion.

The only way to avoid this reality is to seek terms from insurer B that will backdate continuity, which can materially impact the premium charged, and some insurers may refuse to offer such terms particularly when a market cycle is hard. What’s more, switching insurers may require consideration of a “bulk notification” to insurer A, which was the subject of our article here.

Moving back to the scenario, if the insured professional services business has continuous cover  available under its current professional indemnity policy and meets the requirements above (we will assume in this instance there are no indications of fraud), the policyholder will still be able to avail themselves of coverage in the current policy period for the claim notified in policy year 2 to insurer A, subject to a caveat known as a “no greater coverage” principle. This “no greater coverage” principle means a policyholder cannot obtain greater coverage in the current policy period under a “continuous coverage” extension than the policyholder would have had if it notified in policy year 1.

This “no greater coverage” principle often arises for example where a policyholder’s policy limits have increased in policy year 2 compared to policy year 1 or where an excess is smaller in policy year 2 compared to policy year 1, in which case a policyholder will only get the benefit of the smaller limit and will bear the higher excess. Alternatively, some “continuous cover” extensions will accept the claim in policy year 2 but subject to the terms and conditions available when the “circumstances” that led to the claim could have first been notified, which in the scenario would be policy year 1.

What happens if the insured professional services business moved to insurer B in year 2? In short, unless the policyholder was able to obtain a backdated continuity date, insurer B will rely on the “prior known circumstances and claims” exclusion to decline coverage. Likewise, insurer A in year 1 will not accept a late notification of the circumstances noting the policy expired before any notification was made. Thus, in this variation of the scenario, the policyholder is left with a gap in coverage creating a potential uninsured loss.

In summary, careful consideration of “continuous cover” implications should be considered in all “claims made” policies to ensure adequate coverage is always in place.