Switching from Losses Occurring to Claims Made

[Kunjesh Parikh]

A practice question of chapter 2 talks about the problems associated with switching from a claims made to losses occurring. I understand that this can lead to gaps in the cover. But, what happens when the policyholder switches from L-O basis to C-M basis? Under what insurer should the policyholder report its claim to? Can there be any problems here?

 

[Darren Michaels]

Yes there can definitely be problems here too. This is known as double insurance. There would be lots of difficulties trying to determine which insurer would be liable which could delay claim settlement for the insured.

There is also the possibility of fraud where the insured tries to recover the whole claim amount twice once from each insurer.

 

[Kunjesh Parikh]

Yes there can definitely be problems here too. This is known as double insurance. There would be lots of difficulties trying to determine which insurer would be liable which could delay claim settlement for the insured.

There is also the possibility of fraud where the insured tries to recover the whole claim amount twice once from each insurer.

Somebody told me that perhaps that is why UK hasn't yet allowed companies to obtain claims made cover for workers compensation, because historically, it has operated on L-O basis. Is that correct? If yes, then how does UK plan to reform this area? Because LO basis for WC is not very helpful, as it requires establishing the date of occurrence, which might not be possible in a lot of cases, right?

 

[Darren Michaels]

In theory, you do not need to know about the specifics of the UK for the SP7 exam.

However, in the UK under the Employers Liability Act 1969, most employers must purchase Employers Liability (not Workers Compensation) insurance from an authorised insurer or insurers against liability for bodily injury or disease sustained by their employees, and arising out of and in the course of their employment.

It has historically been purchased on a losses-occurring basis so that it covers losses arising during the particular period of employment. For example, if an employee changes employer or even retires and subsequently develops a industrial disease claim (eg asbestos) from exposure in a previous employment, they will still (in theory) be protected by the employers' liability cover purchased by the applicable employer. It wouldn't be fair to the new employer if the employee were to claim on their insurance for something that wasn't caused by them. Equally, the former insurer may stop trading and therefore no longer continue to purchase insurance, but the historical employees should still be protected by the coverage purchased by the employer at the original time of employment.

To my knowledge there are no plans to reform this area in the UK at present.

You are correct that coverage purchased on a losses-occurring basis can cause problems when the date of occurrence is not uniquely defined, eg industrial disease claims where the exposure may take place over many different years / employers. In such cases, the claims are normally shared between employers / insurers using some sensible apportionment, eg pro-rata to exposure.