There are two types of Property & Casualty insurance policies: Claims-Made Policy and Occurrence Policy. It is important to understand the basics of each as the coverage type 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
The simpler and more frequently used policy type is an Occurrence Policy. An occurrence policy protects you as the insured from any covered incident that “occurs” during the policy period, regardless of when a claim is filed. It is in effect lifetime coverage for the policy period. Even if a claim is filed years after the policy period, the policy will respond to the claim as long as the triggering event/ incident occurred during the policy period. So, if you as an employer face the risk of unknown or unreported claims arising long after your policy period is over, an occurrence policy may be the right choice for you.
The more complex claims-made policy type only protects the insured from covered incidents that arise after the policy’s inception date (or its retroactive date if a “start” date other than the policy inception date has been negotiated), and are reported during the policy period. Most Commercial General Liability “claims-made” policies have a retroactive date. The main purpose of the retroactive date is to eliminate coverage for situations or incidents known to the insured that has the potential to give rise to claims in the future, i.e. to prevent the purchase of retroactive insurance. You are covered for incidents that cause injury or damage to a third-party that occur on or after this date as long as the claims related to these events are filed while your policy is still in force. Typically the retroactive date is the inception date of the policy and will not change as long as your policy is continually renewed with the same carrier. Because both the incident and the claim have to be filed during the coverage period, the insurer has a low risk of loss the first year the policy is in force resulting in a lower premium. As the policy renews each year, the coverage period expands as does the insurer’s exposure to loss. So while the initial lower rate of the claims-made policy makes it appealing, by the fifth year that a claims-made policy is in force, the premium has stepped up to be very close to the normal rates for occurrence coverage.
An advantage of having a claims-made policy is that a claim made today is covered by the policy you have today, giving you the benefit or purchasing policy limits that correspond with the current economic conditions and legal environment in which your business operates. A disadvantage is if you cancel your policy, or if it is non-renewed, there is no coverage for claims made after the expiration date of the policy that occurred before that date unless you purchase “tail” coverage.
Tail coverage, also known as an extended reported period (ERP), is coverage purchased to cover claims for incidents that occurred during the policy period but are reported after the policy expiration date. Purchasing tail coverage can be a very costly alternative, frequently 200% or more of the last annual premium.
Which is Right for You?
To determine which policy is right for you, consider the following:
- Premium Cost: Typically for the first five years of coverage, claims-made policies tend to be less expensive than occurrence policies. However, this price typically tends to even out with occurrence policies as time goes on and your business faces more exposures.
- 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 you had during your policy year. Due to inflation and economic conditions, this can result in a large difference in coverage at the time of an incident.
- The Type of Business: If you are in a line of business where you feel that current business transactions may lead to greater chances of claims in the future, then an occurrence policy may be right for you.
Switching carriers or switching policy forms can pose additional challenges. For more information, please contact the insurance professionals at Wallace Welch & Willingham.