Are You Covered? Limitations of Claims Made Policies for Senior Living Facilities

Long Term Care & Senior Housing Update

Client Alert


If a resident in an assisted living or skilled nursing facility sustains an injury, the owner and operator of the facility will generally look to their errors and omissions or professional liability insurance policy for defense and indemnity costs associated with a claim. Such professional liability policies are offered through two different policy types: occurrence and claims made. Whether a policy is occurrence based or claims made based will determine when malpractice claims are covered and not covered. 

Occurrence policies offer coverage for claims that occur while the policy is active. Even if the policy has expired or been canceled, if the incident occurred while the policy was in force, coverage is available. With an occurrence policy, it does not matter when the claim is reported. For example, if a resident is injured on July 10, 2019, but the claim is not reported until May 15, 2021, the occurrence policy in place on July 10, 2019, would be the policy that will respond to the claim. 

On the other hand, claims made policies — sometimes called claims made and reported policies — offer coverage for claims that occur and are reported to the insurer while the policy is in force. In the example above, if the professional liability policy is a claims made policy, then the policy in place on May 15, 2021, would be the policy that responds to the claim. Once a claims made policy expires, any coverage provided by that policy expires unless there is an extended reporting period, which extends the time period for an insured to report a claim to its insurance carrier. If permitted by the insurance carrier, it is possible for an insured to purchase an extended reporting period endorsement or even a separate, stand-alone “tail policy.” An extended reporting endorsement could extend the reporting period, and thus the coverage under a claims made policy, for 90 days, for one year, or even up to five years.

An additional complexity with claims made policies is that they will include a retroactive date, which determines the extent to which a claims made policy will cover losses that occurred in the past. If an accident or injury occurred prior to the retroactive date, the claims made policy will not cover the loss even if the claim is made during the policy period. Typically, when a claims made policy is purchased for the first time, the retroactive date is the same date as the policy inception date.

The nature of the trigger of a claims made policy and the impact of a retroactive date can lead to a lapse in coverage in the acquisition of a senior care living facility. For example, assume the following hypothetical scenario:

  • A resident is injured due to staff conduct on May 15, 2022;
  • The state in which the facility is located has a one-year statute of limitations for personal injury actions;
  • The facility is sold in a transaction that closes on October 1, 2022; and
  • The resident files suit on May 16, 2023.

The resident’s lawsuit will likely name all of the following as defendants in the negligence action: the prior operator, the current operator, the prior owner, and the current owner.

The current owner and operator will likely not have any insurance coverage for the resident’s claim because the claims made policy procured at the time of acquisition will have a retroactive date the same as the policy inception date: October 1, 2022. The prior owner and operator will not have coverage for the resident’s claim unless they purchased an extended reporting period endorsement or a separate tail insurance policy. In short, the resident’s claim could be a completely uncovered loss. While the current owner and operator may eventually be able to obtain dismissal of the claims against them in a summary judgment disposition, the costs associated with defending a case up to the point of such dismissal could be significant.

To guard against such lapses in coverage, the current owner and operator should require that selling entities procure extended reporting or tail coverage so that there is coverage in place that can provide defense and indemnity for claims that arise from conduct occurring during the prior ownership tenure. Ideally, the new owner and operator would be named as an additional insured on such tail policy. In the current insurance market, however, obtaining additional insured status on tail policies or extended reporting period endorsements has become increasingly difficult. As an alternative to such coverage, buyers may require the seller to establish a reserve account for the benefit of the new owner and operator, funded at limits that would replace coverage otherwise provided by an insurance policy. The complexities of insurance coverage require close attention to the risk transfer provisions of any acquisition documentation.