Professional liability insurance is provided either on an occurrence basis or a claims-made basis. The two have several important differences.
Fitness professionals should have a good understanding of the types of insurance they should carry. Photo courtesy of Sports & Fitness Insurance Corp.
Every fitness professional needs professional liability insurance, but do you know which kind is right for you? Many of your clients or facilities where you work never ask you for proof of insurance, and those that do likely will be satisfied with any piece of paper you show them. The type of insurance that you have and the company that stands behind it is not important—until the day something happens. Then, both suddenly become vitally important.
Professional liability insurance, or errors and omissions insurance, protects against claims filed by clients arising out of errors, negligent acts or omissions during the course of rendering professional services. It is provided either on an occurrence basis or a claims-made basis. The two have several important differences, but these two differences are the most important: how the limits work and timing of when the claim is filed, which triggers coverage.
An occurrence policy protects you from any covered incident that occurs during the policy period, regardless of when the claim is filed. An occurrence policy will respond to claims that are reported even after the policy has been cancelled or non-renewed, as long as the incident occurred during the period in which the coverage was in force. In effect, an occurrence policy offers permanent coverage for incidents that occur during the policy period.
Occurrence limits restore each year so that claims paid for incidents arising from one policy year do not deplete limits available to cover claims from other years. Each year that an occurrence policy is in force represents a separate set of limits. Ten years of coverage under a $1 million/$3 million occurrence policy could theoretically provide the insured protection for up to $30 million in claims (10 years multiplied by the annual aggregate limit).
Claims-made policies provide coverage for claims only when both the alleged incident and the resulting claim filing happen during the period the policy is in force. Coverage is provided as long as the insured maintains continuous, uninterrupted coverage. Each year that the policy is continuously renewed, the coverage period is extended. Claims made after the end of the coverage period will not be paid, even if the incident occurred while the policy was in force. A claims-made policy will cover claims after the coverage period only if the insured purchases extended reporting—or tail—coverage, which can become expensive.
Unlike occurrence policies, claims-made policies do not restore each policy year. The limits in force at the policy's inception are the only limits available to pay all claims for all years the policy is continuously in force.
Let's examine two scenarios that highlight the benefit of liability insurance on an occurrence basis. Let's say that you bought a policy on Jan. 1, 2009, and renewed it in 2010 and 2011. In 2012, you forgot to renew the policy and the coverage lapsed (or you or your insurance company chose not to renew the policy for some reason).
Meanwhile, you trained Client X in 2010. In 2012, he filed a claim alleging that on Oct. 10, 2010, your negligent instruction resulted in a back injury. The back injury necessitated a series of surgeries, and Client X is filing a lawsuit to recoup the cost of medical care, lost wages, and pain and suffering.
Since your policy was in effect on Oct. 10, the date the claim occurred, it does not matter that your coverage lapsed in 2012. Your occurrence policy was in effect the day the incident occurred, and you will have coverage.
On the other hand, a claims-made policy responds only if both the incident and the resulting claim filing happen while the policy is in force. So, because the claim in this scenario was reported in 2012 after your policy had lapsed, you would not be covered by a claims-made policy even though the incident occurred in 2010 while your policy was in force.
Using this same scenario, let's say that in 2013, the gym where you train clients asked for proof of coverage. You realized your insurance lapsed in 2012, so you purchased a new policy effective Jan. 1, 2013. Client X makes the same claim in 2013 for an incident that occurred on Oct. 10, 2010. Do you have coverage?
With an occurrence policy, you would be covered because the incident occurred while your policy was in effect.
With a claims-made policy, you would not be covered. Remember that coverage is provided in a claims-made policy as long as the insured maintains continuous and uninterrupted coverage, which, in this scenario, you did not do. To use insurance lingo, when your policy lapsed, your retroactive (or retro) date changed. Your claims-made policy will have a retro date listed on the declarations page, and you are covered for an incident as long as it occurs on or after the retro date. If your coverage lapses, your retro date changes to the start date of the new policy period, and you have a gap in coverage.
Although claims-made coverage is often less expensive, it is important to understand why it costs less and why it is important to make an informed buying decision based on more than price alone. Cheap insurance is great—until you find out that your claim is not covered and the $25 you initially saved ends up costing you thousands.
If you are considering buying a claims-made policy, keep the following in mind:
- Any lapse in coverage can change your retro date and potentially invalidate coverage.
- If your insurance company cancels or non-renews your coverage, or goes out of business, then you may not have coverage for any incidents reported today that happened in past years.
- If your insurance company changes policy terms this year, it changes the coverage provided for incidents occurring in past years—even if you maintain continuous and uninterrupted coverage.
- If you go out of business or stop training clients, you will have to buy expensive tail coverage to ensure that you continue to have coverage for past incidents.
Content Sponsored by Sports & Fitness Insurance Corp.
Steve Shelton is a principal at Sports & Fitness Insurance Corp. (SFIC), an insurance agency that has focused on fitness since 1985. SFIC provides comprehensive insurance coverage to health clubs, studios and fitness professionals in all 50 states. Shelton has nearly 20 years of experience in corporate management and administration, including high-level sales and relationship management. As one of the owners of SFIC, he is responsible for agent and customer relations as well as all marketing and communications. Shelton has served SFIC in a variety of roles throughout the years, including chief operations officer and president.