Claims Made vs. Occurrence Made

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Modern commercial insurance liability policies most often fall into one of two categories – occurrence or claims-made – and the form on which your policy is written is important to understand. Generally, Professional Liability policies are written as claims-made insurance contracts and General Liability policies are written as an occurrence based policy.

In a nutshell, the major difference between a claims made vs occurrence policy lies in the date a claim is made. While some business owners tend to see this as something minor or negligible, the timing of the claim affects whether or not the incidence is covered. One timing mistake could result in a claim being denied. Leaving your business responsible for defense costs, settlement charges, medical reimbursements, or any other related liabilities.

So what’s the difference between an occurrence policy and claims made coverage? How important is it for your business, and can a seemingly small difference in policy type affect your coverage for a claim? The answer is yes – and here’s why.

Occurrence Coverage

An occurrence policy protects you from the declared coverages if the incident occurs during the policy period, meaning the date of the loss must be within the covered period — but the policy does not need to be in effect when the claim is filed. Even if the policy has been cancelled or expired, as long as the incident happened “during” the covered period, the claim would remain insurable

While timing is not as vital when it comes to an occurrence policy, keep in mind that the incident must occur within the policy effective dates. An occurrence policy offers coverage for small businesses given the following conditions:

  • The occurrence must be covered within the insuring agreement.
  • The incident must occur during the policy period.
  • The liability should be unknown to the insured before the policy was purchased.

Example:

One of your customers accidentally slipped at your shop and suffered a broken leg. Your customer didn’t file a lawsuit against you until one year after the incident happened. However, at this time your policy has expired. With occurrence policy, you are still protected even if your insurance has already lapsed or if you’ve secured coverage with another insurance carrier. You are still eligible for the coverage because the loss took place during the coverage period.

Claims-Made Coverage

To understand the difference between claims made vs occurrence, it’s important to understand how a claims-made policy works. A claims made policy provides insurance for claims made while the policy is in force. It will also cover claims made against you for past acts if there is a retroactive date listed on the policy and the claim is within the allotted time period. Because claims made policies carry a retroactive date, it is imperative to keep coverage in continuous force from year to year, in order to keep insurance active for claims arising from your past work. With a claims-made policy, the coverage would only be effective if the loss happens and the claim is made while the policy is active. Meaning both the alleged incident and the resulting claim should take place within the policy period. A claims made policy will not cover claims which arise after the policy expires, even if the loss occurred while the policy was in effect.

A claims made policy also includes an extended reporting period clause. Included in most policies is a grace period of coverage after the policy expires (usually 60 days). Past that you can elect for extended reporting coverage for an additional 1-7 years. This will extend coverage for a claim made after the fact, for acts performed while the policy was in force.

For a claim to be covered on a claims-made policy:

  • The claim for damages must be made during the policy period or within the extended reporting period.
  • The damage must happen on or after the retroactive date, but not after the insurance policy expires.

The retroactive date is a provision present on most claims-made policies and and can affect the eligibility for the claim. When a retroactive date is included, it provides no coverage for claims that occurred before the retroactive date. Any incident that occurred or damages incurred prior to the specified date will not be covered by the insurance policy. Some policies will offer Full Prior Acts coverage, which is the most desirable addition for insuring past work.

Example:

One of your customers claims you made an error in providing your professional service. You had a policy in place at the time of the loss, but the policy lapsed prior to you placing the claim. In this scenario you would not be eligible for the coverage. But if you report claims while your policy is still active, the claim would be eligible for coverage subject to the terms of your policy.

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