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by tfehring
1812 days ago
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I don't have a ton of experience in E&O, but I do work in insurance and I don't think this is right. Buying a policy to file a claim for an event that already happened is called fraud, and while it does happen, it's generally pretty easy for insurers to detect and prevent. In general the advantage of claims-made policies from an insurer's perspective is that they don't have to hold incurred but not reported (IBNR) reserves after the policy term. With an occurrence-basis policy on a relatively long-tailed line like E&O, the insurer generally needs to hold IBNR for several years after the end of the policy term. It's expensive to lock up capital for that long - as the insured you effectively pay for that capital (through higher premiums) at the insurer's cost of equity, generally upwards of 10% annualized for stock insurers. Obviously the insurer's tail risk is also lower for a claims-made policy, but that's less of a factor at scale since it's diversifiable. (Or at least mostly diversifiable - there might be some contagion risk.) |
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>Buying a policy to file a claim for an event that already happened is called fraud, and while it does happen, it's generally pretty easy for insurers to detect and prevent.
Detection has underwriting costs associated with it. Investigating whether you knowingly purchased an insurance policy with an incoming claim is not something that is automated. By default a claims made policy will prevent the issue in the first place by resetting what is known as the retroactive date. This causes the lapse in coverage the OP was referring to.
There are specialty insurers who will allow you to explain extenuating circumstances, and/or set retroactive dates prior to the effective date of the first claims-made policy. You obviously pay for the additional risk this poses to the insurer though.