Most commercial general liability (CGL) policies are written on an "occurrence" basis. An "occurrence"-based CGL policy is usually triggered when bodily injury (BI) or property damage (PD) takes place—even if the claim or suit for damages because of that BI or PD is not made for months or years later.
Other CGL policies are written on a "claims-made" basis. Claims-made CGL policies are triggered when a "claim" for BI or PD is first made against an insured—provided the BI or PD took place after the "retroactive date" shown in the policy declarations page. Unlike the occurrence-based CGL policy, the claims-made CGL policy does not require that the BI or PD take place during the same policy period in which the claim is made against the insured.
Claim Reporting Condition
Claims-made policies can be further distinguished by when the claim asserted against an insured must be reported to the insurer. A "claims-made-and-reported" policy's insuring agreement conditions coverage on the insured reporting the claim within a specified period. 1 Thus, a "claims-made-and-reported" CGL policy is triggered only if (1) the "claim" for BI or PD is first made against an insured during the policy period, and (2) the "claim" first made against the insured is reported to the insurer during the stipulated specified period (or extended reporting period, if any). 2 Because it is easy to overlook, it is critical to emphasize that a claim first made against an insured by a third party is not the same as and should not be conflated with an insured's responsibility to report the third-party claim to the insurer.
A "pure claims-made" CGL policy does not include a specific time limit for claim reporting—only that the claim must be reported "as soon as practicable" or "promptly." 3 An Insurance Services Office, Inc. (ISO), claims-made CGL policy would normally be considered a "pure claims-made" policy. For more on the ISO claims-made CGL policy, see "The Claims-Made CGL Policy."
An illustration on timing may be helpful.
Occurrence versus Claims-Made Policy Illustration
If Nick's Contracting, Inc., has purchased an "occurrence"-based CGL policy, it will cover damages because of BI or PD that may arise from his work if that BI or PD takes place during the CGL policy period. He will have coverage under his occurrence-based CGL policy even if the injured party does not make a claim or bring a suit against Nick's Contracting for damages because of the BI or PD until years after his CGL policy has expired—say, for our illustration, that happens to be 3 years later. The key point here is that the occurrence-based CGL policy in effect when the BI or PD occurs will be the policy that is triggered.
Stated differently, the policy not triggered is the occurrence-based CGL in effect when the claim is made or suit is filed—in this illustration, the CGL policy in effect 3 years later. Of course, if no occurrence-based CGL is in effect when the BI or PD occurs, then there is no coverage. Unlike claims-made coverage, occurrence coverage inherently includes a "tail," meaning that it provides coverage for BI or PD occurring during the policy period but that results in claims or suits made after the policy period. 4
For more on the workings of the trigger of occurrence-based CGL policies, see "Coverage Challenges in CGL Insuring Agreements."
If Nick's Contracting had a "claims-made" CGL policy, the policy must be in effect when the claim is first made against him to have coverage under the policy—in this illustration, 3 years after the BI or PD took place. And, once Nick has received the "claim" made by the third party, he must comply with the requirement to report the claim to the insurer. For a "claims-made-and-reported" CGL policy, Nick must report the claim made against him to his insurer, typically in writing, during that same policy period in which the claim was first made against him or a limited specified period after expiration of that policy (possibly within 60 to 90 days of that policy expiration).
If purchased at the expiration of a "claims-made-and-reported" policy, extended reporting periods (ERPs) typically do not change this reporting requirement. The purpose of an ERP is to report claims first made against the insured during the ERP but only for BI or PD that took place prior to the policy expiration. In our illustration, Nick had received the claim first made against him during the third-year policy period and not during an ERP—therefore, he was required to report that claim to the insurer during that policy period or the specified time after the policy expiration. 5
Strictly Enforced Claim Reporting Condition
Here's the rub—by failing to report that claim within the specified time, Nick will likely entirely forfeit all coverage. This is because the trend is for the courts to strictly enforce the specified time to report the claim. The reason is that, by including in the insuring agreement the reporting requirement, courts have viewed the reporting as a condition precedent to coverage. Until the condition of reporting is met, the insurer owes no coverage. Put differently, courts generally conclude that putting the reporting requirements in the insurance agreement of claims-made-and-reported policies makes the condition sufficiently material to the contract that the ordinary notice-prejudice rule does not apply. 6
While an insurer must usually demonstrate prejudice to escape coverage because of the late reporting of a liability claim, this would not apply to the failure to report claims within the specified time for claims-made policies. Insurers are usually excused from coverage when the insured fails to comply with the reporting condition of a claims-made policy. Take note: claims-made policies are just different.
Claims Reporting Condition—A Recent Example
In a highly publicized matter, the Students for Fair Admissions sued the Presidents and Fellows of Harvard College on November 17, 2014. Although not a CGL policy, the liability policy was a claims-made-and-reported policy. Harvard reported the claim to AIG, its primary liability insurer, on November 19, 2014. But Harvard did not report this matter to its excess liability insurer, Zurich, until May 23, 2017.
The Zurich policy period was November 1, 2014, to November 1, 2015, and required Harvard to report claims during the policy period but no later than 90 days after the end of the policy period, which was January 30, 2016. Of course, May 23, 2017, is well after the claims-made-and-reported period had expired; Zurich denied coverage. The US District Court, District of Massachusetts, upheld Zurich's coverage denial with its ruling on November 2, 2022.
Harvard appealed to the First Circuit Court of Appeals. In its ruling of August 9, 2023, President & Fellows of Harvard Coll. v. Zurich Am. Ins. Co., No. 22-1938 (1st Cir. Aug. 9, 2023), upholding Zurich's claim denial, the First Circuit made this crucial observation:
But not all liability insurance policies are on an equal footing, and the "no harm, no foul" principle does not apply to failures to give timely written notice under claims-made insurance policies.
Further noting the difference in claims-made-and-reported liability policies, the court explained the purpose of claims-made policies:
The purpose of a claims-made policy is to minimize the time between the insured event and the payment. For that reason, the insured event is the claim being made against the insured during the policy period and the claim being reported to the insurer within that same period or a slightly extended, and specified, period. If a claim is made against an insured, but the insurer does not know about it until years later, the primary purpose of insuring claims rather than occurrences is frustrated. Accordingly, the requirement that notice of the claim be given in the policy period or shortly thereafter in the claims-made policy is of the essence in determining whether coverage exists. Prejudice for an untimely report in this instance is not an appropriate inquiry.
Source: President & Fellows of Harvard Coll. v. Zurich Am. Ins. Co., No. 22-1938 (1st Cir. Aug. 9, 2023), citing Chas. T. Main, Inc. v. Fireman's Fund Ins. Co., 551 N.E.2d 28, 29-30 (Mass. 1990).
In short, the primary purpose of a claims-made-and-reported policy would be frustrated if the requirement to report the claim to the insurer during the policy period (or slightly extended specified period) was not enforced. The timely reporting of the claim is the very essence of a claims-made policy.
Making a Claim
To comply with the reporting requirements, policyholders need to know what is and what is not a "claim" according to the policy terms. Too often, a policyholder fails to provide the required reporting of a claim for several reasons.
A common mistake is for the policyholder to refuse to report the claim because of concern for increases in future premiums or attempting to avoid paying out-of-pocket the defense costs that fall within the deductible. This can be combined with the general notion that the claim is, at least in the mind of the policyholder, completely without merit—they have done nothing wrong. An example would be an employee who has lodged a complaint with the state employment commission alleging wrongful termination. The policyholder may think the claim is absurd and treat it with complete disdain by simply tossing out the report of the complaint.
Another common situation arises with continuous claims-made coverage, often with the same insurer. The trouble here is the policyholder does not believe that coverage may be forfeited because a claim made against them in year one will not be covered if not reported in that same policy year—reporting the claim in year two should suffice. But this gets to the crux of the matter: a claim first made in policy year one must also be reported in policy year one (or some limited time thereafter such as 60 days). Reporting that claim several months into policy year two will likely result in no coverage, even if the coverage is continuous with the same insurer.
Specific Reporting Requirements
Most of today's claims-made policies have very specific reporting requirements—listing on the declarations the mailing or email address or fax number that the policyholder is required to use. For example, sending in a renewal application to the insurer with a new claim may not be viewed by the insurer as a report of a claim according to the policy terms. Reporting the claim to an insurance producer instead of the insurer may also fall short of compliance with the policy's reporting condition. After all, the contractual obligation to report the claim applies to the policyholder, not the insurance producer.
A Hybrid Claims-Made Policy
The observation by the First Circuit that "not all liability policies are on equal footing" is particularly germane to certain claims-made CGL policies.
A 2022 ruling by the Supreme Court of Washington, Preferred Contractors Ins. Co. Risk Retention Grp., LLC v. Baker & Son Constr. Inc., 514 P.3d 1230 (Wash. 2022), found that a purported claims-made-and-reported CGL policy was unenforceable against Washington's public policy, answering a certified question from the US District Court. The CGL policy wording was very odd in that it had features of both an "occurrence" and "claims-made-and-reported" policies. The court observed (in pertinent part):
These were claims-made policies. However, the insuring agreement provided coverage with language more similar to an occurrence policy:
But this CGL policy also included the following "claims-made-and-reported" wording:
d. ... [T]his policy shall apply only to claims first made against the insured and reported to us in writing during the policy period. Coverage under this policy will only apply to claims made against the insured and reported to us on or after the policy inception date and prior to the policy expiration date as shown on the Declarations page(s), subject to the extended reporting period provided below.
As a condition precedent to any coverage (defense or indemnity) under this Policy, You must give written notice to the Company of any claim as soon as practicable, but in all events no later than:
(a) the end of the Policy Period; or
(b) 60 days after the end of the Policy Period so long as such "Claim" is made within the last 60 days of such Policy Period.
Source: Preferred Contractors at 1232–1233.
To trigger this CGL policy, the BI or PD had to occur during the policy period—a long-established "occurrence" policy trigger. The kicker, though, is that claim for damages because of BI or PD also had to be first made against an insured and reported to the insurer during the same policy period (or possibly 60 days after the policy period) in which the BI or PD took place.
Here, the CGL policy dates were from January 5, 2019, to January 5, 2020, and from January 5, 2020, to January 5, 2021. The BI took place on October 31, 2019—an accident resulting in a fatality. An attorney's letter, the "claim," was sent to the insured on September 23, 2020, putting the insured on notice that a wrongful death claim was being pursued. That "claim" was reported to the insurer 2 days later on September 25, 2020.
Nonetheless, the insurer denied coverage because the "claim" for damages due to the BI was not made against the insured during the CGL policy period in which the BI occurred—the January 5, 2019, to January 5, 2020, CGL policy period. Rather, the claim was made about 11 months later during the January 5, 2020, to January 5, 2021, CGL policy period. But since the BI did not occur during the latter policy period, neither policy provided coverage based on its terms.
The court labeled this policy as a "nonretroactive" claims-made policy. But, it is important to understand that this CGL wording provides no retroactive coverage because the insuring agreement limited coverage to BI occurred during the policy period, not because of any retroactive date limitation. In other words, a retroactive date limitation, which is common on claims-made CGL policies, would have no relevance on a policy with this wording.
Quoting from another case, the court commented that the CGL policy being considered had combined the worst features of "occurrence" and "claims-made" policies and the best of neither and that it would be a rare instance in which the error occurred and was discovered with sufficient time to report it to the insurance company, all within a 12-month period. Applying a state statute requiring contractors to have financial responsibility, the court ruled that "we cannot enforce insurance provisions that render coverage so narrow it is illusory." Ibid. at 1237.
Conclusion
The trend to strictly construe the reporting conditions of claims-made policies is notable as demonstrated by Harvard's loss of coverage for its late claim reporting to Zurich in the Students for Fair Admissions litigation. Policyholders need to be aware that claims-made policies are generally treated differently because of its nature. That is, a claims-made policy is intended to reduce the delay for insurers in obtaining accurate claims data to "promote fairness in rate setting." For the most part, insurers do not have to demonstrate prejudice to escape coverage under the reporting conditions of claims-made policies.
While most CGL policies are "occurrence" and not "claims-made" policies, the concepts here apply equally to liability policies purchased by policyholders and written on a claims-made and reported basis, including directors and officers liability insurance, employment-related practices insurance, fiduciary liability insurance, and professional liability insurance, as well as certain aspects of cyber and other policies. The penalty for not observing the reporting conditions of claims-made policies can be severe—including complete forfeiture of coverage. Concerns about premium increases, paying deductibles, or that you have done nothing wrong and can fix it yourself should be considered in light of the real possibility of losing coverage.
Finally, all claims-made policies are not created equal. CGL policies that purport to be claims-made because of the reporting requirements but that also contain "occurrence" triggers by providing coverage only if the BI or PD that occurs during the policy period offer very limited coverage. Such policies may provide no coverage at all because they require a rare confluence of events to be triggered: first the BI or PD, then the claim or suit, and finally the report of the claim or suit to the insurer—all within the same policy period.
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