Virtually all liability policies fall into one of two categories: occurrence or claims-made. An occurrence policy covers claims resulting from an injury or another event that occurs during the policy term. Coverage depends on the timing of the event. A claims-made policy covers claims that are made during the policy period. In this type of policy, coverage depends on the timing of the claim.
Most liability policies purchased by small business owners are occurrence policies. An exception is errors or omissions policies, which typically apply on a claims-made basis. This article will describe the key differences between claims-made and occurrence policies. For the purposes of demonstration, it will compare the occurrence version of the ISO general liability policy with its claims-made cousin.
Most business liability policies are written on the occurrence version of the ISO Commercial General Liability Coverage Form (CGL) or on a form very similar to it. This form covers damages that you (the named insured) or any other insured becomes legally obligated to pay because of bodily injury or property damage. For a claim to be covered, the alleged bodily injury or property damage must:
- be caused by an occurrence that takes place in the coverage territory
- occur during the policy period; and,
- be unknown to the insured before the policy begins
Note that a claim is covered by the CGL only if the injury or damage occurs during the policy period. The policy doesn't specify when the occurrence (accident) must take place. Thus, an occurrence may happen before or during the policy period, as long as the injury or damage it causes occurs during the policy period.
The CGL is also silent regarding the timing of claims. Claims may be made during the policy period or anytime thereafter. A key advantage of an occurrence policy is that it covers claims filed many years after the policy has expired.
ISO offers a claims-made version of the ISO CGL described above. In many respects, the claims-made CGL is identical to its occurrence counterpart. The exclusions, limits, definitions, and "who is an insured" sections in the two forms are very similar.
At first glance, the insuring agreements in the two forms appear to be the same. Like the occurrence CGL, the claims-made form covers damages that the insured becomes legally obligated to pay because of bodily injury or property damage. To be covered, moreover, the bodily injury or property damage must be caused by an occurrence that takes place in the coverage territory. However, the claims-made form contains two provisions not found in the occurrence form:
- A claim for damages must first be made against any insured during the policy period or any Extended Reporting Period that is provided.
- The bodily injury or property damage must occur on or after the Retroactive Date if one is shown in the Declarations, but not after the policy period expires.
Characteristics of Claims-Made Policies
The paragraphs cited above demonstrate two key characteristics of a claims-made policy. First, the policy limits coverage to claims first made during the policy period. A claim is typically “made” on the date that you (or your insurer) first receive or record it. A claim made before the policy inception date or after the expiration date is not covered.
Secondly, a claims-made policy may contain a retroactive date. When a retroactive date is included, no coverage is provided for claims resulting from events that occurred prior to that date. The retroactive date is the earliest date on which injury or damage may occur and still be covered under the policy. For example, suppose you are insured under a claims-made policy that has a retroactive date of January 1, 2016. Your current policy applies from January 1, 2017, to January 1, 2018. On March 3, 2017, you receive a claim for an injury that was sustained on December 15, 2015. Because the injury occurred before the retroactive date, the claim is not covered.
The retroactive date is usually the inception date of your first claims-made policy. This date should remain the same each time your claims-made coverage is renewed. It should not be advanced (moved up) as this will reduce your coverage. When shopping for claims-made coverage, try to avoid buying a policy that includes a retroactive date. Many insurers offer policies that don't contain this provision.
Claim Reporting Requirements
All claims-made policies stipulate that claims must be made during the policy period. Many policies (including the ISO claims-made CGL) do not specify a time period for reporting claims. Rather, they simply state that claims must be reported as soon as practicable (or as soon as possible). These policies are known as pure claims-made policies.
Some policies are more restrictive, requiring claims to be made and reported to the insurer during the policy period. These policies are called claims-made-and-reported policies. A pure claims-made policy is preferable to one that applies on a claims-made-and-reported basis since the former affords broader coverage.
Claims-Made to Occurrence Policy
Coverage gaps may occur if you switch from a claims-made policy to an occurrence policy. The following example demonstrates why this is true.
Suppose that you are insured under a claims-made general liability policy. Your policy begins on January 1, 2017, and ends on January 1, 2018. When your policy expires, you elect to renew it under the standard occurrence-based policy. Your occurrence policy runs from January 1, 2018, to January 1, 2019.
On December 15, 2017, Ed, a customer of yours, is visiting your office when he trips and falls on a loose piece of carpeting. Ed injures his back. On March 15, 2018, you are notified that Ed has filed a lawsuit against your firm. He claims that you are liable for his injury because you failed to properly maintain the carpet. Jim seeks $50,000 in compensatory damages. The claim is not covered under your claims-made policy because it was made after the policy had expired. The claim is not covered under your occurrence policy either since Ed’s injury did not occur during the term of that policy.
Extended Reporting Period
The coverage gap cited above could have been avoided if you had purchased an extended reporting period. An extended reporting period or ERP extends the time period during which claims may be made and/or reported to the insurer. It does not extend your policy. A claim is covered by an ERP only if it results from an injury (or another covered event) that occurred before your policy expired.
Many claims-made policies provide an automatic ERP if your insurer cancels or non-renews your policy, replaces it with an occurrence policy, or advances the retroactive date. The automatic ERP usually applies for a short time, such as 60 days.
Reasons for Buying Claims-Made Coverage
Claims-made policies have a number of pitfalls, so businesses typically buy them out of necessity rather than choice. Some coverages, such as employment practices liability, are available only under claims-made policies. Other coverages, like employee benefits liability, may be available on either type of form, but the occurrence version may be very expensive. Because claims-made forms afford less coverage, they are usually cheaper than occurrence forms.