What is the difference between claims made and occurrence insurance

Understanding Occurrence vs. Claims-Made Policies

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Understanding Occurrence vs. Claims-Made Policies
Occurrence coverage:
Claims-made coverage:
Complications when trying to switch from Claims-made to Occurrence
Six reasons why the Occurrence Policy is superior to the Claims-made Policy
Need help choosing the right policy? Contact Paul Owens for assistance.
Should I do claims made or occurrence?
Which is cheaper claims made or occurrence?
What is an example of an occurrence in insurance?
What is an occurrence claim?

General Liability, including Products Liability, may be purchased as either Occurrence or Claims-made coverage and understanding the differences may seem difficult. As a general rule, Occurrence coverage offers superior protection but it can be significantly more expensive than Claims-made coverage.

Occurrence coverage:

The superior Occurrence coverage protects against covered lawsuits as long as the policy is in force when the bodily injury or property damage occurs. As long as this condition is met, coverage is not jeopardized if the policy is later cancelled or not renewed when the claim or lawsuit papers are subsequently filed.

Claims-made coverage:

The inferior Claims-made coverage protects against covered lawsuits only when the following two conditions are met:

The policy is in force when the bodily injury or property damage occurs (just like Occurrence coverage) AND
The policy or a renewal of the policy (with a properly set retroactive date) is still in force when the claim is made unless the optional extended reporting period (AKA tail coverage) has been purchased.

The second condition makes Claims-made coverage much more risky than the Occurrence coverage because the policy may not be renewed if the insured manufacturer or distributor can’t afford the renewal premium, shuts down operations, or if renewal terms are not offered by the carrier.

Complications when trying to switch from Claims-made to Occurrence

Manufacturers or distributors with Claims-made coverage that shut down their operations may elect to buy an optional extended reporting period (AKA tail coverage), which in effect converts their prior Claims-made policies into an Occurrence policy during the reporting period; however, this can be quite expensive. Also, the reporting period may only be extended for one to five years, depending on the offering from the carrier.

Changing a Claims-made policy to a new carrier upon renewal may be tricky because of a provision in a Claims-made policy known as a “retroactive date.” It is critical that the retroactive date is always set to be the first date that the first Claims-made policy was effective.

Even though Occurrence coverage is clearly superior for the reasons stated above, many start up operations opt for Claims-made coverage due to the affordability issue. The above information on Occurrence, Claims-made, bodily injury, property damage, coverage triggers, retroactive dates, optional extended reporting period, and tail coverage have been greatly simplified for explanation purposes. You should always consult with a business insurance professional before making critical decisions in these areas.

Six reasons why the Occurrence Policy is superior to the Claims-made Policy

1. Your current or future contract with a vendor may require an Occurrence Policy in order to do business. Simply put, the Occurrence Policy provides better protection for your vendors. If you were to go out of business or discontinue a product, your vendor wants to be protected by your policy (ex: legal defense and payments for settlements or judgments) if there are any past injuries involving your products that could result in a future lawsuit. An expired claims-made policy is not going to respond to these past injuries, unless you have purchased the “optional extended reporting period.”

2. It is easier to change carriers at renewal. Claims-made policyholders may find it impossible to change insurance carriers once an actual claim has brought your risk potential to the attention of insurance underwriters. Even if you can get a quote from another insurance carrier, it will be difficult to negotiate the proper retroactive date (see definition above) to change to a new Claims-made insurance carrier or nose coverage to change to a new occurrence carrier.

3. You are better protected if you can no longer afford insurance and have to “go bare” while continuing to operate. With an Occurrence Policy, at least you know your past policy(ies) will respond to any injuries that occurred while such policy(ies) were in effect. On the other hand, the Claims-made policy or a renewal has to be in effect or current at both the time of the injury AND the filing of the claim in order to respond.

4. If you have discontinued a hazardous product line, any past injuries involving your products are covered by the insurance policy that was in force at the time of the injury. With a Claims-made policy, the policy renewal must be in force both at the time of the injury AND when the claim is filed.

5. If you go out of business and cease operations you have some comfort in knowing any past injuries involving your products are covered by the insurance policy that was in force at the time of the injury. With a Claims-made policy, the policy renewal must be in force both at the time of the injury AND when the claim is filed.

6. If you sell your company, the new buyer is more likely to accept liabilities of your past products in the marketplace. With a Claims-made policy you are more likely to have to purchase the “extended reporting period” on your Claims-made policy and be responsible for all liabilities for at least two more years.

It is important to note, that many hazardous products with a long product life may be impossible to insure with an Occurrence Policy. I believe this is because an insurance carrier can better cut their losses by non-renewing a claims-made policy versus an occurrence policy.

Need help choosing the right policy? Contact Paul Owens for assistance.

Should I do claims made or occurrence?

Claims-made coverage is portable. You can take the coverage from one insurance company to another. The advantage to an occurrence policy is its permanence. The period of time you are insured under an occurrence policy is protected forever by the policy you had that year.

Which is cheaper claims made or occurrence?

In short, occurrence-based policies provide ample coverage as long as you keep renewing them. For this privilege, you'll generally pay more than you would for claims-made policies. With claims-made policies, the amount of coverage you purchase must last for as long as you keep your policy.

What is an example of an occurrence in insurance?

Occurrence policies cater specifically to events that may cause injury of damage years after they occur. For example, if an individual is exposed to hazardous chemicals, a significant amount of time could pass before they fall ill. Occurrence coverage will usually cover the employer and the former employee for life.

What is an occurrence claim?

An occurrence policy provides coverage for incidents that happen during your policy period, regardless of when you file a claim. These policies can be more expensive than a claims-made policy because of how long coverage applies.