In trying to answer the question “Should I cancel a claims made insurance policy?” it is vital that the policyholder understand what the claims made basis of settlement under a policy is and what the ongoing potential liabilities may be in respect of previous work.
Cancelling a claims made insurance policy
The consequences of cancelling a claims made insurance policy are rarely understood by the policyholder, who will often feel aggrieved when the full extent of what cancellation means becomes apparent, as all the prior cover that has been paid for is lost except for claims or circumstances that might give rise to a claim already reported. See more on the difference between claims made and claims occurring basis.
What is a claims made insurance policy?
Claims made basis is on e one of the two made bases of cover for liability insurance, the other being a claims occurring basis.
A claims made insurance policy covers claims made and reported to the insurer during the policy period in respect of work undertaken after the policy retroactive date.
What happens when a claims made policy is cancelled?
When a claims made policy is cancelled there is no active policy that a claim can be made against, so there is no cover for claims made or reported to the insurer after cessation of cover even if the claim arises from work undertaken during the period of cover. Effectively all previous cover paid for is worthless.
Any claims made or circumstances that could give rise to claim reported during the period of cover will continue to be dealt with and will not be affected by the policy cancellation.
What type of policies are on a claims made basis?
The most common claims made policy is professional indemnity, along with its derivatives such as medical malpractice, treatment risk, directors and officers liability and trustees indemnity.
Some public liability and product liability insurances for high risk activities or high risk products may be on a claims made basis, as will some extensions to the cover such as financial loss or retroactive cover.
The consequences of cancelling any claims made policy are the same.
If unsure whether the policy is on a claims made basis, seek confirmation from the insurance adviser.
Do I need insurance cover if I have stopped trading?
Insurance cover may still be necessary even after stopping trading.
Liability can still attach even after cessation of trading and some contracts entered into require insurance, typically professional indemnity insurance, to be maintained for up to 12 years.
Any decision to cancel cover, especially if cover is on a claims made basis, must take into account the potential exposure to future claims and the contractual liabilities assumed whilst trading.
Is there anything I can do to maintain cover?
The only answer is to continue to buy insurance.
Cover can be maintained by either continuing to buy the standard cover or by buying run off cover.
If the standard cover is continued, there is cover for past and future work undertaken after the retroactive date and will attract the appropriate premium.
Can I buy “run off cover”
Run off cover will cover work undertaken after the retroactive date but before commencement of the run off cover, i.e. it will not cover work undertaken during the period of run off cover. Run off insurance is an annual contract and the first year of run off cover is likely to be similar cost to the standard cover as a significant risk remains, but the premium should reduce over time as the likelihood of a claim diminishes. More information is available on our run off insurance page.