Malpractice Insurance Claims made vs. Occurrence-based Coverage

Before digging into the basics of legal malpractice insurance, I’m going to share a little insurance history in order to set the stage.  Prior to the 1970’s, legal malpractice policies were occurrence-based, which meant that if a malpractice policy was in force during the time the alleged malpractice occurred, the insured lawyer would have coverage for that claim. It worked like your auto policy does today.

If a malpractice misstep occurred (think car accident), you were covered if you had a policy in force on the date that the misstep happened (again, think date of the car accident).  It didn’t matter when the actual malpractice claim was made.  All that mattered was that a policy was in force at the time the misstep occurred.

This occurrence-based approach created all kinds of problems for the insurance industry, due to the difficulty in trying to determine the appropriate price for the risk they were taking on each time a policy was issued.  Think about it.  How can an insurance company accurately price a policy that makes the company perpetually obligated to indemnify their insureds for claims that could arise under any issued policy period?  In light of this problem, insurers abandoned the occurrence-based approach to legal malpractice coverage and switched to claims-made and reported coverage.

Initially, a claims-made policy was intended to address situations where claims would become known immediately. The policy provided coverage for any covered event that occurred and was reported during a policy period.

For example, if a lawyer blew a Statute of Limitations (SOL) date in the middle of a policy year and then also reported the claim during this same policy year, coverage would be in play. This change allowed the insurance industry to more accurately determine an appropriate price for the risk being taken on.

In short, the insurer’s liability was no longer open-ended. Unfortunately, this created a new problem, because lawyers need coverage that is somewhat open-ended. After all, a claim may not arise until years after the malpractice occurred.

To address this shortcoming, the insurance industry next introduced coverage for prior acts, which established a retroactive coverage date. With prior acts in place, any alleged malpractice that occurred on or after the retroactive coverage date would be covered as long as the alleged malpractice was reported in compliance with policy provisions and was a covered error, act or omission according to policy terms. This is why almost all coverage available and purchased in the legal malpractice insurance marketplace today is claims-made and reported coverage with prior acts in place.