Claims-Made vs Occurrence Policies

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Commercial liability insurers offer two types of policies: claims-made and occurrence. This article will explain how they differ. Business owners should keep these differences in mind when shopping for liability insurance.

Timing of Claims

Accidents can cause injuries, and injuries can lead to lawsuits. These events don't always occur within a single policy period. For example, Tracy owns Tasty Treats, a coffee shop.

One day, a customer named Bill slips and falls in Tracy's cafe. When a waitress tries to help, Bill says he is alright and leaves the restaurant. Nine months later Tracy receives notice of a lawsuit. Bill is suing her business for bodily injury.

Bill's accident occurred on November 5, 2015. At the time of the accident, Tasty Treats was insured under a standard general liability policy that ran from January 1, 2015 to January 1, 2016. When her policy expired, Tracy replaced it with another one-year policy that began on January 1, 2016. Tracy received Bill's lawsuit on August 15, 2016. Which policy will cover Bill's lawsuit?

The answer depends on whether Tracy's policy applies on an occurrence or a claims-made basis. Coverage is triggered under an occurrence form when an injury, damage or other event occurs. Under a claims-made form, coverage is triggered when a claim is made.

Occurrence Coverage

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 or after the policy period.

General liability is not the only commercial 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, are available under occurrence and claims-made forms. Many occurrence malpractice policies cover injuries that result from medical treatment if the treatment was provided during the policy period. 

The primary advantage of occurrence policies is that they cover claims that arise after the policy has expired. As long as the injury, damage or other triggering event took place during the policy period, a claim resulting from that event should be covered no matter when the claim is filed.

Claims-Made Coverage

As its name suggests, a claims-made policy covers claims that are made during the period. For a claim to be covered, the claim must be made against the policyholder during the term of the policy.

The injury that leads to the claim may take place before or during the policy period.

Claims-made policies provide 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 can be expensive. Moreover, it applies only to claims that arise from triggering events (such as bodily injury) that took place before or during the policy period. It does not cover claims that arise from future events.

Some claims-made policies limit coverage to claims that arise 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 change from one insurer to another, your new insurer may retain your existing retroactive date. Alternatively, it may insist on changing the date (moving it forward). This is a bad idea (for you, anyway). It will eliminate coverage for claims arising from events that occurred before the new retroactive date.

Which to Choose?

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 are more likely than occurrence policies to contain hidden pitfalls. For example, some claims-made policies have strict requirements for reporting claims.
  • Switching Insurers The process of changing from one insurer to another is easier if you are insured under an occurrence policy.
  • Availability The type of coverage you are seeking may be unavailable or prohibitively expensive under an occurrence form. For example, directors and officers liability coverage is provided only under claims-made policies.

Article edited by Marianne Bonner

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