Claims-made Versus Occurrence Policies

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There are two basic types of liability policies: occurrence  and claims-made. Most liability policies purchased by small business owners are occurrence policies. An exception is professional liability (errors or omissions) policies, many of which apply on a claims-made basis.

This article will explain 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.

Occurrence Policy

Most business liability policies are written on the occurrence version of the commercial general liability coverage form (CGL). 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 meet all of the following requirements:

  1. It must be caused by an occurrence that takes place in the coverage territory.
  2. It must occur during the policy period.
  3. It must be unknown to the insured before the policy begins.

Two important points should be emphasized. First, a claim is covered by the CGL only if the injury or damage occurs during the policy period. However, the policy doesn't specify when the occurrence (accident) must take place. Consequently, bodily injury or property damage that occurs during the policy period may be covered, whether the occurrence that caused it took place during the policy period or before the policy began.

Secondly, the CGL is silent regarding the timing of claims. Thus, claims may be filed during the policy period or anytime thereafter. This is a key advantage of an occurrence policy. Claims may be covered even if they are made many years after the policy has expired.

Claims-made Policy

ISO offers a claims-made version of the ISO CGL described above.

Like the occurrence version, the claims-made CGL covers damages that the insured becomes legally obligated to pay because of bodily injury or property damage. To be covered, bodily injury or property damage must be caused by an occurrence that takes place in the coverage territory. In addition, the following two conditions must be met:

  • 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 Policy

The above paragraphs 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 received or recorded 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. This 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 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. Some claims-made policies do not have a retroactive date. Because a retroactive date represents a coverage restriction, it is best to purchase a policy that does not include this feature.

Companies typically purchase claims-made policies because occurrence coverage is either unavailable or too expensive. 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.  When both types of coverage are available, the claims-made coverage is likely to be cheaper than the occurrence coverage.

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, 2016 and ends on January 1, 2017. When your policy expires, you elect to renew it under the standard occurrence-based policy. Your occurrence policy runs from January 1, 2017 to January 1, 2018.

On December 15, 2016, 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, 2017, you are notified that Ed has filed a lawsuit against your firm. He claims that his injury resulted from your negligence since you failed to properly maintain the carpet. Jim seeks $50,000 in compensatory damages. The claim is not covered under your previous claims-made policy because you were not notified of the claim until 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 other 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 on your renewal policy. The automatic ERP generally applies for a short time, such as 60 days.