Sunrise Provision

DEFINITION of 'Sunrise Provision'

A contract provision that extends coverage to events that occurred before the contract was signed. Sunrise provisions are used in insurance and reinsurance contracts.

Also known as a Sunrise Clause.

BREAKING DOWN 'Sunrise Provision'

Insurance and reinsurance contracts provide the policyholder protection from specific risks during a predefined time period. The time period in which the policy remains in effect is one of the most critical aspects of the contract, as it both limits the amount of time that the insurer is exposed to a risk as well as the amount of time that the insured is protected from losses. In some cases, however, losses may only appear years after the insurance contract term has ended.

For example, in an auto insurance policy the insured is protected against the risk of a vehicular accident. Identifying that a loss has occurred tends to be simple, as property damage is visible as soon as a car accident occurs. Damage is thus immediately identifiable. Losses from other types of risks, such as negligence or malpractice, may not be immediately identifiable, since they may develop over the course of several years. For example, a patient may only begin to experience complications from surgery years after the surgery itself. This presents the possibility that the loss is only identified after the insurance policy protecting the insured has expired. In order to protect the insured from losses that take a long period of time to develop, insurance and reinsurance policies may contain a sunrise provision.

Sunrise provisions allow the insured to retain coverage against losses that are reported while the current insurance policy is in effect, but which actually occurred during the time period before the current policy became active. This type of provision is increasingly rare in contract language due to increased usage of sunset provisions. Sunset provisions limit the amount of time the insured has to report the occurrence of a loss after a policy expires or is canceled.

Insurers and reinsurers prefer to use sunset provisions because these provisions set a strict time limit on how long the insurers will be liable for claims, whereas sunrise provisions allow the insured to maintain a level of coverage despite no longer having to pay premiums on an expired or canceled policy.

Sunrise and sunset provisions are found in claims-made policies, rather than occurrence policies. Occurrence policies focus on when the incident occurred rather than on when it was reported, whereas claims-made policies focus on when a claim is made against the policy. Provisions are found in the endorsement section of the insurance contract, and do not alter the terms or conditions of the rest of the policy beyond what is stated in the provision.