Property and casualty insurance policies are available as either claims-made or occurrence policies. Which type of policy you have affects whether or not your insurer will cover a claim, so it’s important to understand how these forms of insurance work. 

What is an occurrence policy?

Occurrence policies will handle claims related to any covered incidents that occur while your policy is active, regardless of when the claim is made. If an accident occurs during your policy period, but you don’t submit a claim until after your policy has expired, the claim will still be covered. In situations where previously unknown claims might surface years later, this type of coverage can be very helpful. Most property and casualty policies are occurrence policies. 

Example:

• Your interior design company has a general liability policy, which is an occurrence policy. The policy is in effect from January 1, 2019 to December 31, 2020. In September 2020, you install a chandelier for a client. Your employee accidentally fails to secure the chandelier correctly, and in January 2021, the chandelier falls and injures someone. Because the incorrectly completed work occurred while the policy was active, the claim would be covered. 

What is a claims-made policy?

Claims-made policies provide coverage for incidents that occur during the policy period if the policy is active when the claim is submitted. If, after your policy expires, a claim arises of bodily injury, property damage, or another event that occurred while your policy was active, your insurer would not cover the claim. Most professional liability insurance and directors and officers liability insurance policies are written on a claims-made basis. 

Example:

• Your architecture firm had a professional liability policy active from January 1, 2018 to December 31, 2019. The policy is written on a claims-made basis. In March 2019, you designed an outdoor deck for a restaurant. In April 2020, the deck collapses because due to structural design mistakes. The client files a claim against your company. Although the policy was active when the incident occurred, your insurer will not provide coverage because the claim was made after the policy lapsed.

What is a retroactive date in a claims-made policy?

Many claims-made policies have retroactive dates. If you have an active claims-made policy with a retroactive date, you would be covered for any incidents that occur after the retroactive date. This applies to incidents even if they occurred years in the past before you acquired your policy. However, incidents that happened before the retroactive date would not be covered. 

Example:

• Your architecture firm has a professional liability policy active from January 1, 2020 to December 31, 2020. The policy is written on a claims-made basis with a retroactive date of January 1, 2019. In November 2019, you designed an outdoor deck for a restaurant. In December 2019, the deck collapses due to structural design mistakes. The client files a claim in January 2020 against your company. Although the loss occurred prior to your active policy coverage, the claim would be covered because the loss occurred after the retroactive date of your policy.

What is tail coverage on a claims-made policy?

Tail coverage can be purchased to cover claims after your policy has expired. Also called an extended reporting period, this coverage helps you avoid a gap in insurance by covering instances where a loss occurred during the policy period, but the claim was brought after your policy had expired. 

Example:

• Your accounting firm had a claims-made professional liability policy in effect from January 2015 to December 2018, after which you ended that policy but purchased six months of tail coverage. In May 2019, a client makes a claim that you made a data error while filing her taxes in 2018, and she had to pay additional fees as a result. Your tail coverage would provide coverage, even though your policy ended before the claim was made.

If an incident occurred while your policy was active, but you did not learn of it until after that policy ended, your tail coverage would step in to handle the claim. It’s critical to consider purchasing this coverage if you are retiring or may have a gap in coverage when switching to a new insurer. Otherwise, you could find yourself without any coverage for your past work.

Which is better: occurrence policies or claims-made policies?

Each type of policy has advantages and disadvantages, and which one is the better choice depends on the type of insurance and your business’s individual risk exposures and coverage needs. Because of the different types of claims covered, specific types of insurance are most commonly written as claims-made policies, while others are more likely to be written as occurrence policies. 

Occurrence policies are the most common type in property and casualty insurance. The advantage of occurrence policies is that you will always have coverage for any incidents that occurred during the period of time that you had an active policy, even if the policy later expires. This means that if you change insurance policies or discontinue your business, you don’t have to worry about coverage gaps or purchasing tail coverage to ensure that unanticipated claims would be covered. 

If your company deals with situations where a claim might arise years later, occurrence policy coverage can be the simplest way to ensure that your company always has financial protection. However, it’s important to note that occurrence policies will cover you at the level of coverage you had during the applicable policy year. If many years have passed, your coverage amount could be less than current coverage. 

Claims-made policies are common in professional liability insurance and directors and officers liability insurance. One advantage of claims-made policies is that they are often more affordable than occurrence policies. However, claims-made premiums typically increase on a yearly basis, since the risk of a retroactive claim goes up over time. After a longer period of time, the chances of a retroactive claim lessen, and claims-made and occurrence policy prices may be comparable in price. Claims-made policies can be much more complicated if you want to change to another insurer or policy. 

Another advantage of claims-made policies is that they can cover past incidents that occurred before you purchased the policy, as long as it is within the retroactive date. They may even cover incidents that occurred while you had a different active policy. You can often add prior acts coverage to fill any gaps in your past coverage. In addition, unlike occurrence policies, claims-made policies will cover past claims at your policy’s current coverage level.

What are the limits of insurance for occurrence policies and claims-made policies?

Insurance policies typically have a per-incident limit, which is the maximum amount the insurer would pay for a single claim, and an aggregate limit, which is the maximum amount the insurer would pay over a policy period. 

For occurrence policies, the aggregate limit is usually renewed on a yearly basis when you renew your policy. Claims are subtracted from the limits of insurance in the policy year the event occurred in. This means that if a claim for a previously unknown event arises in a later year and you did not use your full limits of insurance, the claim could be covered under those remaining limits, rather than your current year’s limits. In addition, legal defense fees are typically outside of the limits of insurance, meaning that these costs do not decrease the funds available to you. 

Example:

• Your general liability policy is an occurrence policy. It has a limit of $2 million. You are sued and must pay a settlement of $1.5 million. You would have $500,000 of coverage remaining for the rest of the policy year, but at the beginning of the next year when the policy is renewed, you would have another $2 million available. 

Claims-made policies’ aggregate limits do not typically reset, and they often include the costs for legal defense in their limits. If you renew a policy with an endorsement to cover prior acts or a retroactive date that covers the prior policy period, coverage for any older claims would be provided under your current policy limits, meaning that your aggregate limit would be over a longer period of time than one year. However, if you purchase tail coverage for your previous policy, claims that fall into that time period would not affect your currently active policy’s limits. 

Example:

• Your professional liability policy, which is written on a claims-made basis, has a limit of $2 million. After a lawsuit, you must pay a settlement of $2 million. Since this exhausts your limits of insurance, you would not have any further coverage available to you unless you increase the limits of your policy. 

Final Word

Insurance policies can be written on either a claims-made or an occurrence basis, depending on the type of insurance you are purchasing. It’s important to understand which type of insurance you have because these policies handle claims differently, and you could find yourself being obligated to pay for large defense fees, medical costs, and settlements out of pocket if your insurer denies a claim. It’s crucial to check with your insurer to determine what type of policy is best for your business.