Insurance policies come in various forms, and understanding the differences between them is crucial for both individuals and businesses. Two common types of liability insurance coverage are ‘claims made’ and ‘occurrence’ policies. Although they may sound similar, these insurance policy types function quite differently, especially regarding when a claim is covered. Knowing the distinctions between claims made and occurrence policies helps policyholders make informed decisions and avoid unexpected gaps in coverage. This topic explores these two types of insurance, their features, benefits, and potential drawbacks in an easy-to-understand way.
What Is a Claims Made Insurance Policy?
A claims made insurance policy provides coverage only if the claim is made during the policy period, regardless of when the event causing the claim happened. In other words, the policy must be active when the claim is reported for the insurance company to respond. This type of policy often requires the claim to be reported within the policy period or a specified extended reporting period after the policy expires.
Key Features of Claims Made Policies
- Coverage applies only if the claim is reported during the policy period.
- The event causing the claim can happen before the policy period but must be unknown at that time.
- Often includes an extended reporting period (‘tail coverage’) to report claims after the policy ends.
- Typically used in professional liability insurance, such as malpractice or errors and omissions policies.
Example of Claims Made Policy
Imagine a doctor with a claims made malpractice insurance policy from January 2023 to December 2023. If a patient makes a claim in November 2023 about an incident that occurred in 2022, the insurance will cover it. However, if the claim is made in January 2024, after the policy ends, it won’t be covered unless the doctor has purchased tail coverage.
What Is an Occurrence Insurance Policy?
Occurrence insurance policies provide coverage for claims resulting from events that occur during the policy period, regardless of when the claim is actually made. This means that if the incident causing the claim happened while the policy was active, the insurer will cover the claim even if the claim is filed years later.
Key Features of Occurrence Policies
- Coverage applies to any event that occurs during the policy period.
- The claim can be reported at any time, even after the policy has expired.
- There is no need for extended reporting periods because the coverage is tied to when the event occurred.
- Commonly found in general liability insurance.
Example of Occurrence Policy
A company with a general liability occurrence policy in place from 2020 to 2021 would be covered if a claim is made in 2025 about an accident that happened in 2021. The claim is covered even though the policy expired years ago because the incident took place during the policy period.
Comparing Claims Made vs Occurrence Policies
Although both policies provide liability coverage, they differ significantly in terms of timing and claim reporting. Below are some important points to consider when comparing claims made and occurrence insurance policies.
Timing of Claims
- Claims Made: Claim must be reported during the active policy period or within an extended reporting window.
- Occurrence: Claim is covered if the incident happened during the policy period, no matter when the claim is made.
Cost Differences
Claims made policies are often initially less expensive because the insurer’s exposure to long-tail claims is limited by the reporting period. However, costs can increase over time, especially when purchasing tail coverage. Occurrence policies tend to have higher premiums upfront but provide lifelong coverage for incidents occurring during the policy term.
Coverage Portability
- Claims made policies can pose challenges when switching insurers or retiring from a profession because of the need for tail coverage.
- Occurrence policies offer more peace of mind since coverage is tied to the date of the incident, making them simpler to manage over the long term.
Claims Reporting
Claims made policies require diligent reporting during the policy term. Missing the reporting window can result in denial of coverage. Occurrence policies offer more flexibility, as claims can be reported any time after the event occurred.
When to Choose Claims Made vs Occurrence Policies
Choosing between claims made and occurrence insurance policies depends on your specific needs, profession, risk factors, and budget. Here are some considerations for making an informed choice.
Who Should Consider Claims Made Policies?
- Professionals like doctors, lawyers, and consultants who face claims related to their services.
- Businesses wanting lower initial premiums and willing to manage extended reporting periods.
- Those who plan to maintain continuous coverage and purchase tail coverage if needed.
Who Should Consider Occurrence Policies?
- Businesses seeking long-term peace of mind without worrying about reporting deadlines.
- Organizations with risks that might lead to claims years after an event.
- Those preferring simpler insurance management without the complexity of tail coverage.
Advantages and Disadvantages
Advantages of Claims Made Policies
- Lower upfront premiums.
- Good for professionals with predictable risks.
- Can be customized with extended reporting periods.
Disadvantages of Claims Made Policies
- Coverage depends on timely reporting.
- Can be costly to maintain tail coverage after policy ends.
- Changing insurers can complicate claims handling.
Advantages of Occurrence Policies
- Coverage for claims made anytime after the incident.
- No need for tail coverage.
- Simpler claims process and peace of mind.
Disadvantages of Occurrence Policies
- Higher premiums upfront.
- Potentially higher costs for insurers, reflected in pricing.
Understanding the differences between claims made and occurrence insurance policies is vital when purchasing liability insurance. Each has its strengths and weaknesses, and the right choice depends on individual circumstances, risk tolerance, and financial considerations. Claims made policies offer lower initial costs but require careful management of reporting periods. Occurrence policies provide broader protection with more straightforward claims handling but usually come at a higher price. By comprehensively assessing your needs and consulting with insurance professionals, you can select the coverage that best safeguards your interests and provides long-term security.