What is a Claims-Made Policy?
For Real Estate Errors and Omissions, for example, insurance companies offer a type of coverage called a "Claims-Made" policy. This policy only pays out for incidents that both happen and are reported within certain time frames.
Here's how it works:
An incident (like an injury or accident) must occur between two dates. These are called the "retroactive date" (the start date) and the "policy expiration date" (the end date).
The policyholder must then report the incident to the insurance company either while their policy is active, or during a short period after the policy ends, called the "extended reporting period."
Both of these conditions must be met.
In insurance terms, a "claim" is a formal request to an insurance company asking for a payment based on the terms of the insurance policy.
This "Claims-Made" policy is often cheaper for the person buying the insurance because it covers a shorter time period. For the insurance company, this policy limits their risk because they don't have to worry about claims being reported a long time after the policy ends. This helps keep the insurance company financially stable.