Be Careful When Changing Business Insurance Policies
Switching between insurance policies may result in coverage gaps, and failing to report claims may preclude a defense and coverage.
Changing insurance policies without
careful consideration can be hazardous to your bottom line. When
changing policies, you need to evaluate more than just the
premium expense; instead, you must understand what type of
policy you have and carefully review its language and your needs
so you do not inadvertently leave claims uncovered.
Most commercial general liability
policies purchased by small business owners are occurrence
policies, meaning the policy will insure a covered event that
occurred during the policy period, regardless of when the claim
is reported to the insurer. These policies are fairly
straightforward. Even if a claim arises after an occurrence
policy has expired, the policy that was in effect during that
occurrence generally will still be on the hook. With occurrence
policies, changing to a new policy with a different insurer
presents fewer risks.
These days, however, most employment
practices and professional liability policies (such as errors
and omissions and directors and officers coverage), are
claims-made instead of occurrence policies. These will
ordinarily state that they are claims made or claims made and
reported on the declarations page or the first page of the
Claims-made policies have a greater
potential for coverage gaps when changing policies, as well as
other hazards that arise from not fully understanding the terms.
These types of policies ordinarily cover only a claim for
damages first made against an insured during the policy period
or perhaps a short period afterward, depending on the precise
policy language. The insurers coverage obligation may be
triggered on the date the insured first became aware of the
possibility of a claim. The failure to report this claim to
the insurer during a policy term may result in having no defense
or coverage for a subsequent lawsuit, a risk that is
particularly heightened when you have changed insurance
In addition, what constitutes a claim
that should immediately be reported to the insurer varies
significantly depending on the terms of the policy. A claim may
occur when the insured receives some type of communication that
is something less than a lawsuit. Many policies define claim
broadly to include a verbal or written demand for money or
non-monetary damages, including an administrative proceeding or
even an employees internal complaint.
Not knowing when or what to do when a
claim arises can lead to having no defense or coverage for
subsequent litigation. Some policies allow insureds to try to
protect themselves by reporting any incidents or circumstances
that occur during the policy that may lead to a future claim.
With this type of policy, if an incident is reported and
litigation later results, a higher probability exists of being
provided with defense and coverage.
This article is a brief caution; a full
discussion of these issues could fill a book. Just be aware that
switching between insurance policies may result in coverage
gaps, and failing to report claims may also preclude a defense
and coverage. Therefore, be careful and consult your insurance
professional and/or lawyer if you would like a better