“Sunset Clauses and Your Policy”

“Sunset Clauses and Your Policy”

While we’ve talked about the hidden dangers about cheap insurance  on this blog, there seems to be no limit to what corner-cutting insurance companies are willing to pass on to their customers. One particular topic that most policyholders may be unaware of is something called a “sunset clause.” In this article, we’ll take a look at just exactly what a sunset clause is, how it’s defined by insurers,  and understanding your policies to determine if you’re really covered as much as you think you are.

What is a Sunset Clause?

In the simplest terms, a sunset clause (also known as a “tail”) is part of your insurance policy that is related to the time limit when you can make a claim and be considered for coverage. After that period elapses, you will not be eligible for coverage.

As an example, suppose you have a policy that claims a two-year sunset clause (see below). Any claim made against the policy has to have occurred during the policy period and made no later than two years after the inception of the policy (hence, the “sun setting”). If an incident occurs after this two-year period elapses, you will NOT be covered.

An important note to make is that sunset clauses only appear in claims-made policies, not occurrence-based ones.  For a detailed explanation, check out our blog on that occurrence vs. claims-made policies.  

How is a Sunset Clause Worded?

Let’s look at an example of how a sunset clause may appear in your policy:

“This policy shall not apply to claims made against any insured that are reported to us more than two (2) years after the policy expiration date or cancellation date, which is the earlier date without regard to the timing of the property damage, bodily injury, personal injury or advertising injury regardless of whether any insured has coverage with us or any other insurer providing coverage for such claims.

The provisions of this endorsement shall not extend any other time limitation set forth in the policy to notify us of a claim, lawsuit, occurrence or offense.

This endorsement applies without regard to whether we issue a renewal policy or any other policy with an expiration date after the expiration date of this policy. “

[Source: http://ventureins.com/images/articles/R0201_Sunset_Clause.pdf]

Who Benefits, and Is There a Better Option?

If you’re wondering why this is added to most insurance policies, it is solely for the insurer’s benefit—not the insured. Typically, underwriters  understand that by selling cheaper insurance, they can entice potentially-risky clients but exclude the insurer from paying by limiting the claiming ability of the insured. This is especially true for construction business insurance , where a defect in work might not be found until years later, exposing the business to potential lawsuits while leaving the insurer off-the-hook.

In New York, the limitation for lawsuits on construction is six-years, so a six-year sunset clause might seem acceptable. HOWEVER, there is a trick at play by these insurers—those six-years for the statute of limitations may not start until certain conditions are met. For a condominium project, a certain number of units must be sold before the ten years of the statute of limitations begins.  Meanwhile, the insurance policy’s sunset clause begins immediately after the end of the policy period, leaving an uninsured gap that exposed the “insured” to lawsuits. And of course, it’s not uncommon for a year or more to pass before the clock starts and units are sold up to par.

However, there is a solution. In traditional occurrence form policies, there’s no limitation to when a claim can be reported. Based on the wording of the policy, the claim would still be covered years after the fact of the occurrence itself.

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If you’ve felt an urge to check your policy’s fine print to see whether or not you have a sunset clause, you may be surprised to find out how common they are among cheap insurance policies. That’s why having an insurance expert on your side can help avoid being held liable for coverage you thought you had. Contact the insurance advisors at RiskBlock today to ensure that your business and your family won’t let the sun set on your coverage!