Legal Definitions - discovery policy

A discovery policy, also commonly referred to as a claims-made policy, is a type of insurance contract that provides coverage for claims that are first made against the insured and reported to the insurer during the policy period. This means that for coverage to apply, the insured must discover the claim or potential claim and notify their insurance company while the policy is actively in force. The date when the actual incident or error occurred is less critical than the date the claim is discovered and formally reported, although many policies include a "retroactive date" that limits how far back an incident can have occurred and still be covered.

Here are some examples to illustrate how a discovery policy works:

• Example 1: Architect's Professional Liability

  An architect maintains a professional liability insurance policy, which is a discovery policy, from January 1, 2022, to December 31, 2023. In March 2023, a client discovers a significant structural flaw in a building designed by the architect in 2020 and files a lawsuit. The architect immediately reports this claim to their insurer.

  This illustrates a discovery policy because the claim was made against the architect and reported to the insurer during the active policy period (March 2023 falls within January 1, 2022 - December 31, 2023), even though the actual design error occurred in 2020. If the architect had allowed their policy to lapse before the client filed the lawsuit and they reported it, there would be no coverage under this type of policy.

• Example 2: Corporate Directors and Officers (D&O) Liability

  A company's board of directors is covered by a D&O discovery policy for the period of July 1, 2023, to June 30, 2024. In April 2024, a group of shareholders files a lawsuit alleging financial misrepresentation that occurred in late 2022. The directors promptly notify their insurer about the lawsuit.

  This demonstrates a discovery policy because the D&O policy covers the claim made in April 2024, which falls within the active policy period, even though the alleged act of misrepresentation took place in 2022. The crucial factor for coverage is the date the claim was discovered and reported to the insurer, not the date of the original alleged wrongdoing.

• Example 3: Cyber Liability Insurance

  A technology startup has a cyber liability discovery policy active from October 1, 2023, to September 30, 2024. In February 2024, the startup discovers that its customer data was compromised in a breach that occurred in December 2023. Following this discovery, a class-action lawsuit is threatened by affected customers. The startup reports the breach and potential claim to its insurer in March 2024.

  This is an example of a discovery policy because the cyber breach itself happened in December 2023, but the discovery of the breach and the subsequent threat of a claim occurred and were reported in March 2024, which is within the active policy period. The policy responds because the claim was made and reported during its term.