What is sunset clause in liability insurance?

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PostPosted: Fri May 14, 2010 5:10 pm   Post subject: What is sunset clause in liability insurance?  

This morning I reviewed a prospects general liability policy. The policy contained a sunset clause which I was not familiar with. However, after learning about sunset clauses I'm shocked. The prospective client was unaware of what they purchased and I'm certain the prospects customers would not have accepted any certificates they had received had the sunset been revealed.



A sunset clause is a provision in a general liability policy which states that the insurer will respond only to losses reported before some predetermined future date (sunset), usually a set period after the expiration of the policy.



So let's say your GL policy was effective 4/1/07 and expires 4/1/08, and has a 2 year "sunset clause". Any claim made against the policy has to have "occurred" during the policy period and must be "made" no later than 4/1/2010. So if a "latent" defect on work performed some time within the year: 4/1/07 to 4/1/08 is not discovered until April 2, 2010 (2 years and 1 day after expiration) or later, there will be NO coverage under the policy.



You might wonder why this claim wouldn't be covered by the 4/1/10 to 4/1/11 policy? Because a "defective construction" claim is deemed to have "occurred" when the work is done; thus the policy that should respond is the 4/1/07 to 4/1/08 one.



When there is no sunset clause (like the standard CGL policy), the claim can be 'made' any time in the future and you could expect to have coverage.



Guess when most construction defect claims are 'made'?? Just before the statute of limitations runs out. In California the statute on latent defects is 10 years after the work is completed; the statute can vary state to state, please check with your insurance agent to find out what the statute is for your state.



I can think of only one reason why anyone would ever buy a policy with a sunset clause. That is when they absolutely positively can't find anyone else to insure them without one. Yes, you save money by taking a policywith a sunset clause; but insurance companies have run the numbers. If they can sell you something cheaper now to avoid paying a claim in 9 years, that's a good deal for them.

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PostPosted: Fri May 14, 2010 11:46 pm   Post subject:   

Quote:
I can think of only one reason why anyone would ever buy a policy with a sunset clause. That is when they absolutely positively can't find anyone else to insure them without one.




Maybe in your state they call it a "sunset clause" (was that the actual policy language?) but I have always referred to this, based on your description, as what's called a "tail."



Tails only appear in claims-made policies and not in occurrence based contracts. Anytime we had a client that was concerned about any products or completed operations liability and who had a claims-made commercial contract, we always insisted that the insured purchase a "long-tail" endorsement. This is commonly referred to in the industry as a "Supplemental extended reporting period" or a "supplemental tail" or "unlimited tail."



Endorsing this onto a CGL gives the insured an unlimited time to actually report a claim that occurred during the policy period and provides new aggregate limits.



Solve the whole problem by getting an occurrence-based policy. If this was attached to one of those, I've never heard of it. Again- I'll be the first to admit that I certainly haven't heard of everything!



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PostPosted: Sat Sep 11, 2010 1:35 am   Post subject: sunset clause  

Yes, the endorsement is called a "sunset clause" endorsement and some insurance companies are using them on occurence based CGL policies to limit exposure for construction defect claims.


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PostPosted: Sat Sep 11, 2010 9:39 am   Post subject:   

I understand how endorsing this to a CGL will provide with unlimited time. But why do you call them occurrence-based CGL policies? Can you be a bit more specific?

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PostPosted: Tue Sep 14, 2010 9:46 pm   Post subject:   

Quote:
Yes, the endorsement is called a "sunset clause" endorsement and some insurance companies are using them on occurence based CGL policies to limit exposure for construction defect claims.




Wow...wasn't aware! Kind of takes the idea of an occurrence based contract and throws it out the window. I wonder if this has been tested in court yet? Seems to me it completely invalidates the idea of occurrence-based coverage. I can understand the latent defect concern in the construction industry, but I also know that certain construction defects literally take YEARS to discover- well beyond the 2 year sunset period that was stated.



Hmmmm... methinks I have me some more research to do! What do you know! Here's a good article on why sunset clauses are "bad."



http://www.download-construction-forms.com/sunset-clause.html



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PostPosted: Thu Sep 16, 2010 5:05 pm   Post subject:   

I think what InsTeacher was intending to do with the link he posted above was to show that the OP's post is pure plagiarism.



Aside from that, I too have not seen any occurrence policies with such a provision. Almost certainly was applied to a claims-made policy. Can't imagine the Dept of Insurance approving such a provision in an occurrence policy.



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PostPosted: Wed Feb 23, 2011 9:02 pm   Post subject:   

"occurence based" meaning the policy covers claims based on the date the claim occurs rather than when it is presented?



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PostPosted: Fri Sep 28, 2012 1:29 pm   Post subject: SUNSET CLAUSE VS EXTENDED REPORTING PERIOD  

Watch out! Sunset clauses can only be found in occurence contracts! They are used by the insurer to limit the period for reporting a claim. Otherwise, under an occurence policy, the insured can file a claim within the next 1,000 years, as long as it has occured during the insurance period. Extended reporting period is something different. It is a designated time period after a claims-made policy has expired during which a claim may be made and coverage triggered as if the claim had been made during the policy period, which is something beneficial for the customer.


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