This Subtopic provides guidance on three types of insurance contracts. The guidance for each is presented in the following Subsections:
- a
Retroactive contracts
- b
Claims-made contracts
- c
Multiple-year retrospectively rated contracts.
Many entities use claims-made policies to satisfy their insurance needs for such coverage as product, directors and officers, and malpractice liabilities. However, entities have been purchasing coverage for a variety of other exposures using a claims-made format. Under a claims-made insurance policy, an entity is insured for any claims reported during the term of the policy, in many cases including those that occurred prior to the policy effective date but after the specified retroactive date.
Presuming the entity can renew the claims-made policy each year and can obtain tail coverage when desired, such a strategy effectively converts the claims-made policy into an occurrence-based policy covering the entity for any claims made against it.
Entities generally use claims-made coverage because it is the only form of insurance available for certain exposures, particularly exposures for which the occurrence dates may be difficult to determine or for which the occurrence may span a long period of time. Therefore, a claims-made policy mitigates potential coverage disputes because the occurrence date generally is not relevant to the determination of coverage.
An entity (for example, a manufacturer, a retailer, a service entity, or a financial entity) may enter into a multiple-year retrospectively rated contract with an insurance entity. These contracts may cover various types of exposures such as product and environmental liability risks. A critical feature of these contracts is that part or all of the retrospective rating provision is obligatory such that the retrospective rating provision creates for each party to the contract future rights and obligations as a result of past events.