Claims-Made Insurance vs. Per Occurrence Insurance
Claims-Made Insurance vs. Per Occurrence Insurance is an important distinction. All property and casualty (P&C) insurance policies fall into two categories: claims-made and occurrence policies.
Whether your coverage is claims-made insurance vs. per occurrence insurance determines:
- Whether or not your policy will respond to a claim
- What your company’s responsibilities will be in the event of a claim
- How much your premiums will cost, both now and in future renewal periods
Understanding the basic differences between claims-made insurance vs. per occurrence insurance will ensure you have the coverage you need.
Occurrence Insurance Policy
The majority of P&C insurance policies are occurrence policies, which tend to be the less complicated of the two types of coverage. An occurrence policy covers any instance of bodily injury or property damage that happens within your policy period, regardless of the date you submit the claim. This means you could potentially submit a claim years after your policy period ended, as long as the event that triggers the claim occurred during your period of coverage.
One advantage of having this type of policy is that the period of time you are insured is protected “forever” by the occurrence policy you had that year. When your policy period has ended, there is no need to renew the policy or purchase “tail coverage” (explained later in this article) to cover events from your policy period. As a business owner, if you face the risk of unknown or unreported claims arising long after your policy period is over, an occurrence policy might be right for you.
“Manifest” versus “Exposure.” An interesting provision to look for in occurrence policies, as it pertains to bodily injury claims, is the concept of “manifest” versus “exposure.” There is a growing realization and understanding of the dangerous effects of long-term exposure to toxins, such as asbestos, cadmium, crystalline silica and more. Regarding an occurrence policy, the question is whether a bodily injury occurred when the injury “manifested” itself or occurred when the injured party was first “exposed” to the toxin. How an insurer defines occurrence may differ from carrier to carrier, so make sure to discuss this with an ALIGNED Insurance Advocate.
Claims-Made Insurance Policy
Claims-made policies tend to be more complex than occurrence policies because factors such as “tail coverage” and retroactive dates come into play. Claims made policies only cover claims made during your policy period; it’s unnecessary to determine when the bodily injury or property damage occurred.
What’s advantageous about this type of policy is that your claims today are covered by the policy you have today. This gives you the benefit of purchasing policy limits that correspond with the current economic and legal environment in which your business operates.
The disadvantage of a claims-made policy is that if you or the insurer cancels or does not renew the policy, you will have no coverage for claims made after the cancellation or non-renewal date for injuries or damage that occurred prior to that date. This is where purchasing the “tail coverage” would be necessary.
What is a Tail? A “tail,” also known as an extended reporting period (ERP), is coverage you can purchase to cover claims after your policy expires. Tail coverage is purchased to go along with a claims-made policy; with occurrence policies, an ERP is already built-in.
With tail coverage, you can report claims for incidents that occurred during the period you had your claims-made policy, but the key is that you are able to report the claims after your policy expires.
Which Policy is Right for You: Claims Made or Occurrence?
To determine if an occurrence or claims-made policy is right for your business, consider:
- Premium cost. Typically for the first five years of coverage, claims made policies tend to be less expensive than occurrence policies. But keep in mind that as your business faces more exposures, your premiums will increase; usually, after five years, the cost of a claims-made policy begins to even out with occurrence policies.
- The amount of coverage. A claims-made policy covers your claims at your current coverage level; whereas, an occurrence policy covers you at the amount of coverage you had during your policy year. If your occurrence policy period was years ago, your coverage level can be quite a bit less than today’s coverage level, due to inflation and the rising cost of claims.
- The type of business. When determining what policy you need, consider your line of work. Do you anticipate future claims arising out of the current business transactions you have with your customers? If so, then an occurrence policy might be best for you.
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