There are various types of insurance policies to help businesses manage their risks. Some business insurance policies are "occurrence" policies while others are "claims-made" policies. Since the type of policy you have will impact your coverage, it's important to understand the difference.
An occurrence-based policy covers claims that result from an event that occurred during your coverage period. As long as the triggering event occurred during the coverage period, it does not matter if the claim is filed outside the coverage period. For instance, say you had general liability coverage during 2022 and a customer was injured on your premises during that year. You will be covered under that policy for resulting claims, even if the policy expired at the end of 2022 and the injured party waited until 2023 to report the incident and bring a claim against you.
With a claims-made policy, coverage applies to claims made during the policy period, as opposed to incidents that occurred during the policy period. So, if you opened a claims-made professional liability insurance policy at the start of this year, and you are sued this year, coverage will be triggered since the claim occurred during your policy period. You will be covered even if the injury-causing event happened before you took out the policy (provided the potential claim was not something you knew about or should have known about prior to signing the insurance contract).
It's important to note that claims-made policies typically have a retroactive date, which limits how far back in the past triggering events could have occurred. For instance, say your coverage began on January 1, 2023 and has a retroactive date of January 1, 2020. If you are sued by a client today for an event that occurred in 2019, you will not be covered for the claim because the event happened before your retroactive date.
Your claims-made policy may also have a brief extended reporting period, or tail coverage, which covers claims made for a specified time after your policy expires. For instance, if your policy expired June 30, 2023, you may have a 30- or 60-day extended reporting period after the expiration date. This provides you with a sort of grace period in case a claim is brought against you immediately after your policy expires.
Which Policy Types Are Claims-Made vs. Occurrence
In most cases, commercial general liability (CGL) policies, umbrella policies and commercial auto policies are occurrence-based policies. However, many other types of business insurance policies are usually claims-made. For instance, errors and omissions, professional liability, directors and officers liability, employment practices liability and cyber coverage are typically claims-made policies.
Because insurance companies can better manage their risks with claims-made policies, these types of policies typically have lower premiums than occurrence-based policies.
What Is an Occurrence?
In a standard CGL policy, an occurrence is generally defined as an accident, including a continuous or repeated exposure to conditions, which results in bodily injury or property damage during the policy period. There are also some occurrence policies that provide coverage for any damage-producing events that take place while the policy is in effect, regardless of whether the injury occurs during the policy period.
What Constitutes a Claim Under a Claims-Made Policy?
What constitutes a claim under a claims-made policy will vary from policy to policy. For instance, a typical professional liability policy defines a claim as "a written demand for monetary or non-monetary relief received by the insured during the policy period, including the service of a suit or institution of an arbitration proceeding against you." Other policies have much broader definitions of what constitutes a claim. For instance, one directors and offices liability policy lists many different possible scenarios, including:
- An oral or written demand including any demand for non-monetary relief;
- Any civil proceeding commenced by service of a complaint or similar pleading;
- >Any arbitration, mediation or other similar dispute resolution proceeding;
- Any administrative or regulatory proceeding commenced by the filing of the notice of charges, a formal investigative order or similar document;
- Any criminal proceeding commenced by the return of an indictment; or
- Any appeal from any proceeding referred to in this definition
Insurers typically require that you put them on notice of a potential claim – such as if you commit an error that injures a client. With a claims-made policy, if you notify the insurance company of a potential claim, and it becomes a claim after the policy has expired, coverage may still apply because you notified the insurer of the potential claim during the coverage period.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.