What’s the Difference Between Claims-Made and Occurrence Insurance?
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A claims-made policy provides coverage when a claim is filed, regardless of when the event occurred. An occurrence insurance policy provides coverage for events that occur during your policy term period, no matter when the claim is filed. Whether you choose a claims-made policy or an occurrence policy will depend on your business type and current and future circumstances. Generally, the first five years of coverage of a claims-made policy is cheaper than an occurrence policy.
What Is a Claims-Made Policy?
A claims-made policy provides coverage when a claim is filed, regardless of when the event occurred. Insurance carriers will usually write general liability plans on a claims-made form, meaning your provider will help cover claims filed while your policy is active. Claims-made business insurance has two features that may affect coverage: retroactive date (tail) and extended reporting period (ERP).
Your insurance plan provides coverage when something happens on or after a predetermined date. For example, say your insurance coverage begins in January 2022 and has an October 2020 retroactive date. Your client sues you in February 2022 for something that happened in November 2020. Your carrier will cover the claim because the event occurred after your retroactive date and was reported when your policy was active.
Extended Reporting Period
The extended reporting period, also called tail coverage, covers claims made after your policy has expired and can last between 30 and 60 days. For example, if your policy is going to expire in December 2022 and there’s a 60-day extended reporting period, your insurance provider will cover claims reported during this window.
Keep in mind that a claims-made policy will only cover your business if the claim is:
- Filed while your policy is active or within your extended reporting period
- For a loss that occurs on/after your retroactive date
How Does It Work?
If someone reports a claim during the policy period and the event occurred after the retroactive date, the claim would be covered. If someone files a claim after the expiration date of the policy, it will be covered if it’s reported during the extended reporting period.
Below is a visual that shows how a claims-made policy works.
What are the Pros and Cons of a Claims-Made Policy?
A claims-made policy will save you money at the beginning of your policy. However, the possibility of exhausting your limits and the complicated nature of switching providers or plans can make claims-made policies a hassle.
- Lower initial premium: A claims-made policy will usually begin with a lower premium than an occurrence policy. As time goes on and the likelihood of claims grows, the premium for either policy type will become about even.
- Have more flexibility: You can increase your policy’s limits or purchase new coverage that was unavailable when your policy started.
- Offers an ERP option: Purchasing an extending reporting timeframe or tail can protect you by providing a buffer for how long your coverage will protect you.
- Risk of exhausting your policy’s limit: The limit for a claims-made policy doesn’t renew every year. If you reach your limit, your policy has been spent and won’t do you any good the following year.
- Limited reporting time: The tail or extended reporting period is a rider that needs to be purchased. Without it, you won’t have protection past when your policy ends.
- Switching to another insurer or another plan can be complicated: Switching your claims-made policy to another plan or insurance provider can be difficult due to the retroactive date.
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What Is an Occurrence Insurance Policy?
An occurrence insurance policy provides coverage for events that occur during your policy term period, no matter when the claim is filed. Due to how long coverage applies, an occurrence policy can be more expensive than a claims-made policy.
For example, say a customer breaks their leg after they slip and fall on your business property, but they don’t report the incident until two years after your policy has ended. The claim will still be covered because the event occurred when the policy was still active.
How Does it Work?
An occurrence insurance policy will cover a claim regardless of when it is reported as long as the incident occurred during the policy’s active period.
Below is a visual that shows how an occurrence policy works.
What Are the Pros and Cons of an Occurrence Policy?
The simplicity of owning and maintaining an occurrence policy along with renewable limits makes these plans attractive to business owners, despite the higher premium payments.
- Simple to own and maintain: Switching from one insurance provider to another is convenient because you don’t have to worry about the retroactive date.
- Provides renewable coverage: The limit on occurrence policy renews every year — no worrying about a single incident exhausting your coverage for the remainder of the policy’s term.
- Accommodates claims that don’t produce lawsuits right away: Any incident that occurs while your policy is active is covered in perpetuity, meaning you won’t have to worry if someone sues you a year after an event when your policy is no longer active.
- Typically more expensive: Having limits that renew every year along with having coverage that lasts a lifetime will cost more in higher premiums.
Claims-Made vs. Occurrence Insurance: Is One Better Than the Other?
Whether claims-made or occurrence insurance is better will depend on your business’s current and projected circumstances. Both policies are standard types offered for general liability coverage by most commercial insurance carriers with similar limits, riders and discounts. Consider the following:
- Claims-made policies have more flexibility in that your policy from last year covers your prior acts. This means you can increase your policy’s limits or purchase new coverage that was unavailable when your policy started. Since the insurance plan is active when the claim was filed (not the policy you had when you provided the service), you benefit from the upgraded coverage.
- Occurrence policies provide longer-lasting coverage in that the coverage you have lasts forever. There is no need to buy or renew a tail when your policy ends.
Is Claims-Made or Occurrence Business Insurance More Expensive?
The first five years of coverage of a claims-made policy will usually be less expensive than an occurrence policy. However, your premium will increase as your business has more liability exposure.
Claims-Made vs. Occurrence Insurance: How Do I Choose?
The best way to choose what policy to purchase is to consider your business type. If your line of work will naturally lead to future claims coming out of business transactions you have with current customers, then you should consider an occurrence policy. Otherwise, you may want to consider a claims-made policy and enjoy lower premiums for the first few years.
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