Difference Between Claims-Made and Occurrence Policies
Commercial liability insurers offer two types of policies: claims-made and occurrence. This article will explain the differences between the two and why they are important.
Under an occurrence policy, coverage is triggered (initiated) by an injury that takes place during the policy period. While the injury must occur during the policy term, a claim that results may be filed during or after the policy period. Under a claims-made policy, the triggering event is a claim made against an insured during the policy period. The injury that leads to the claim may occur before or during the policy period, but the claim must be made while the policy is in effect. The following example demonstrates the difference between the two types of policies.
Tracy owns Tasty Treats, a coffee shop. One day, a customer named Bill slipped and fell in Tracy's cafe. When a waitress tried to help, Bill said he was alright and left the restaurant. Nine months later, Tasty Treats was served with a lawsuit. Bill sued the business for bodily injury.
Bill's accident occurred on November 5, 2016. At the time of the accident, Tasty Treats was insured under a general liability policy that ran from January 1, 2016 to January 1, 2017. When her policy expired, Tracy replaced it with another one-year policy that began on January 1, 2017. Tracy received Bill's lawsuit on August 15, 2017. Which policy will apply?
If Tasty Treats was insured under occurrence policies, the claim would be covered by the policy that was in effect when the injury occurred. Bill's injury took place during the term of the first policy (January 1, 2016 until January 1, 2017), so that policy would respond to the claim. However, the answer would be different if the policies were claims-made. The first policy will not apply because Tracy received the claim after that policy had expired. The claim was made during the term of the second policy, so that policy would apply.
Most general liability policies are written on occurrence forms. They cover claims or suits seeking damages for bodily injury or property damage caused by an occurrence, or for personal and advertising injury caused by an offense. Claims or suits are covered only if the bodily injury, property damage or personal and advertising injury occurs during the policy period. The claim may be brought during the policy period or after the policy has expired.
General liability is not the only commercial casualty coverage that is written on occurrence forms. Others include umbrella liability, auto liability, and employers liability coverages. Some types of insurance, such as liquor liability and medical malpractice, may be written on occurrence or claims-made forms. Under occurrence medical malpractice policies, coverage is typically provided for injuries that result from medical treatment provided during the policy period. If the treatment occurred before or after the policy period, the injury is not covered.
The primary advantage of occurrence policies is that they cover "long-tail" claims, meaning claims that arise many years after the policy has expired. As long as the triggering event (injury, damage, treatment etc.) took place during the policy period, a claim resulting from that event should be covered. The timing of the claim doesn't matter.
As its name suggests, a claims-made policy covers claims made against an insured during the policy period. The injury that leads to the claim may take place before or during the policy period.
Claims-made policies provide little or no coverage for claims made after the policy expires. This presents a problem to business owners who switch from a claims-made policy to an occurrence policy, or who stop buying coverage altogether. Fortunately, coverage for future claims is available under an extended reporting period (also called "tail coverage"). An ERP covers claims that arise from triggering events (such as bodily injury) that take place before or during the policy period. It does not cover claims arising from events taking place after the policy has expired. An extended reporting period can be expensive.
Some claims-made policies limit coverage to claims arising from injuries that take place on or after a specified date, called the retroactive date. Claims that result from injuries occurring before the retroactive date are not covered. If you switch from one insurer to another, your new insurer should not alter your retroactive date. You should resist any attempt by your new insurer to advance (move up) the retroactive date. Otherwise, you will lose coverage for claims arising from events that occur between your old retroactive and the new one.
Things to Consider
Here are some things to consider when choosing between an occurrence policy and a claims-made policy:
- Cost Claims-made policies are considerably cheaper than occurrence policies.
- Limit Due to inflation, the limit on an occurrence policy may be too low to cover claims filed many years after the policy has expired. The limit on a claims-made policy is more likely to be adequate since the policy covers claims filed during the current policy period.
- Pitfalls Claims-made policies may include restrictions or exclusions that aren't easy to spot. For example, some claims-made policies contain strict claim-reporting requirements.
- Switching Insurers The process of changing from one insurer to another is easier if you are insured under an occurrence policy.
- Availability Some coverages may be either unavailable or prohibitively expensive under occurrence forms. An example is directors and officers liability insurance, which is available only on claims-made forms.
Article edited by Marianne Bonner