The Differences Between Claims-Made and Occurrence Policies
Insurance policies come in all different shapes and sizes, they have a great range of prices, and they come in different forms. Some insurance policies are written on an occurrence basis, and some are written on a claims-made and reported basis. It is important to understand the differences between the two when purchasing your coverage.
In this article, we are going to break down what you need to know about these two different policy forms to:
- give you the knowledge and confidence to ask the right questions
- help you understand which policy form you need
- understand how to better protect your policy according to its form style
Daniels-Head has a deep-rooted belief that the more you know the more confident you can be in your decisions, especially when it comes to the wild world of insurance. So, let’s dive in!
What is an Occurrence Policy?
An occurrence policy provides protection for claims or incidents that took place while coverage was in force, regardless of when they are reported.
This policy form tends to be more desirable to an insured because the policy offers longer protection and is easier to manage. Additionally, many occurrence policies come with fixed costs, which allows an insured to budget their business more accurately.
Occurrence policies create incalculable risks to insurance companies due to their open-ended design. Not all lines of insurance, or carriers, can sustain this policy form. Having occurrence-based policy forms in certain lines led several carriers to exit the market and influenced surviving carriers to move their policies to a claims-made form. An example of this is lawyer’s professional liability insurance.
Some common types of occurrence-based policies include automobile insurance, general liability insurance, business owners’ policies, and workers’ compensation.
What is a Claims-Made Policy?
A claims-made policy requires coverage to be in place at the time a claim is reported, and for the incident to occur after the “retroactive date”.
This policy form has multiple factors that should not be overlooked when purchasing your new or renewal policy. Many claims-made policies do not allow for mid-term changes, so the limits, deductibles, endorsements, standard policy forms, and benefits you choose are important. It is important to review and consider all offers in their entirety prior to making your purchase, as the coverages you renew with will apply retroactively to any future claims.
The complexity of a claims-made policy makes it easy for insureds to throw themselves at the mercy of price, leaving them susceptible to being inadequately insured.
This policy form is designed around the concept of a retroactive date and continuous coverage to safeguard the long-term stability of an insurance company. This time-frame-styled coverage allows the insurance company to quantify risk and price coverages accordingly so they can ensure their sustainability long term.
Some common examples of claims-made policies include lawyer’s professional liability insurance, other professional liability insurance, employment practices liability insurance (EPLI), and cyber liability insurance.
Prior Acts Coverage / Retroactive Date
Prior Acts Coverage is key in a claims-made policy and begins with the retroactive date specified when you first purchase the policy. The retroactive date marks the beginning of coverage and represents the earliest date of an incident that can be reported under the policy.
When you first obtain coverage, the retroactive date is set as the inception date of the first claims-made policy. The policy will only provide coverage from that point forward.
In order to protect your prior acts coverage, and keep your retroactive date intact, you need to maintain “continuous coverage”. You achieve this by renewing your policy without a lapse in coverage or by purchasing an extended reporting period option.
The retroactive date offers carriers insight into the length of risk exposure they undertake by providing coverage. When you have several years of continuous coverage, the retroactive date can indicate to an insurer that your firm or business has stability, longevity, and a commitment to protecting it all.
Prior Acts Coverage is not required for an occurrence-based policy; you only need to have had a policy in place at the time the incident occurred.
Extended Reporting Period (ERP), AKA “Tail Coverage”
An extended reporting period, also known as ‘tail coverage’, is key to maintaining continous coverage of a claims-made policy after you retire, close or sell your business, or join another firm (often times the new firm's carrier will only add you with a retroactive date equaling the date you join the firm).
The ERP will endorse the policy to extend the time for which claims can be reported under the policy. If the policy is canceled or not renewed for any reason without an ERP in place, it would be as though there was never a policy in place.
The ERP endorsement will apply to the policy in place at the time the endorsement is issued, and, with most carriers, it cannot be renewed. This understanding becomes vital during the renewal process, especially when anticipating changes or planning for retirement. By planning for changes in your business, you can speak with your agent at renewal to discuss options available to you for your situation.
For example, if you plan to retire from your profession in a year or two, you should discuss your ERP options for your claims-made insurance policy. Since the ERP applies to the policy in place at the time and is nonrenewable in most cases, you may want to consider increasing your limits, lowering your deductible, or adding additional coverages. Upon retirement, many carriers will offer a free ERP if you have been insured with them long enough to meet their "loyalty requirements".
The key takeaway here is, if you will not be renewing your claims-made policy you will need an ERP Endorsement to protect the prior acts coverage you invested in over the years.
Claims-Made vs Occurrence Form
One policy form is not more advantageous than the other. Each one has its purpose and benefits. Businesses and law firms are all unique and have different insurance needs. It is up to you to review and consider what kinds of coverage, and types of coverage, your business needs to be adequately protected for the longevity of your company.
Learning some foundational pillars of business insurance lines can help you ask the right questions. Partnering up with a knowledgeable and resourceful agent is also key. Find an agent who can answer your questions, prompt additional questions for your business needs, guide you through a streamlined insurance process, and help you navigate unique or difficult situations.
An occurrence policy provides protection for incidents that occurred during the policy period, regardless of when a claim or incident is reported. Its simplicity in securing and renewing coverage, without the need for a retroactive date or tail coverage, makes it highly attractive to insureds. However, the open-ended exposure is not as appealing from an insurance company’s perspective.
On the other hand, a claims-made policy requires coverage to be in place at the time a claim is reported, and the incident must occur after the retroactive date. Also, a claims-made and reported policy requires that you report any claim or potential claim during the policy period in which you received notice of the claim. Many claims-made policies are also claims-made and reported policies. This form of insurance is appealing to insurers due to the measurability of risks. But claims-made policies can be quite a headache for the insured due to the complexity of coverages, requirements, and decisions.
Not all policies are created equal, and neither are your unique needs. Understanding these two policy forms will help you make more confident insurance purchasing decisions for your business. And discussing the options available to you with a knowledgeable agent who can strategically assist you in your search for tailored business insurance solutions can be invaluable long-term.