Businesses often have a choice when it comes to their commercial insurance policies: claims-made or occurrence-based. But what’s the difference, and which one is right for your company? Here’s what you need to know.
When you apply for a claims-made policy, it means that your insurance coverage only kicks in if the incident happens and the claim is filed while your policy is active. In contrast, occurrence policies cover you for claims filed at any time as long as the event happened while you were actively insured.
Below we’ll examine these two types of insurance policies in more detail so you can better understand your policy coverages.
What Is Claims-Made Insurance?
For your insurance company to cover claims with a claims-made policy, you must meet both of these requirements:
- The event triggering the claim must have occurred on or after the retroactive date listed on your policy.
- You filed the claim while your policy was active or within the extended reporting period listed on your policy.
Here’s more on what these important terms mean:
Your retroactive date is a specific date in the past where your insurance provider agrees to cover claims related to any incidents from that point forward, up to your policy limits. This is usually your policy’s inception date, but not always.
If you’ve had continuous coverage in place for years, your retroactive date is likely the date when your policy first took effect. But you may also be able to work with your broker to select a retroactive date even further back in time. Just know that doing so could raise your premiums since it increases your claim-filing risk with the insurer.
Anything that happened before the retroactive date isn’t covered by your policy, even if the claim is filed while your policy is active. You’ll want to pay close attention to the retroactive period listed on your policy, especially if you’re switching insurers.
When an insurance company uses a retroactive date to provide prior acts coverage, it’s known as nose coverage.
Extended Reporting Period (ERP)
The ERP is also known as tail coverage. It covers claims filed from when the policy expires until a specific later date. Any future claims filed during this period for events occurring while you had your policy are likely covered.
If you want to have indefinite claims coverage after your policy expires, you may be able to add a supplemental extended reporting period (SERP) endorsement to your policy. When you add both nose and tail coverage, you help eliminate gaps in your claims-made coverage.
Tail policies can also help protect against coverage gaps if you change from a claims-made to an occurrence policy. That’s because occurrence policies generally don’t cover incidents before you switched. But your old claims-made policy still could if you had tail coverage in place.
Because of the potential coverage gap, changing your policies around isn’t something you should do on a whim. Be sure to discuss with your broker how changes to your current policy can impact future claims.
How Claims-Made Policies Work
Below is an example to help you better understand how claims-made policies work in practice.
You’re a recently retired doctor. You held a claims-made malpractice insurance policy throughout your career and let it lapse when you stopped practicing medicine.
Unfortunately, a client you treated two years before you retired is now suing you for malpractice. And though you had insurance coverage during the period of time you treated them, you no longer have an active policy now that the claim is being filed.
With a claims-made policy, your insurance likely won’t cover this malpractice lawsuit—unless you purchased tail coverage. In that case, your insurer would cover claims made after your policy’s termination until the end of your extended reporting period.
Many types of business insurance policies are typically claims-made, such as:
- Employee benefits liability insurance
- Employment practices liability insurance
- Professional liability insurance or errors & omissions (E&O) insurance
- Directors and officers (D&O) insurance
Note that not all insurers give you the option of choosing an occurrence policy when claims-made is the standard. The opposite is also true.
What Are Occurrence Policies?
Unlike claims-made policies, occurrence policies cover you for any event happening while you were insured, even if the claim is filed years after your policy expired. However, they don’t have a retroactive date, which means your coverage for incidents begins at your policy’s inception and not before.
Some insurances that are usually written as occurrence policies are commercial general liability, business automobile, and umbrella policies.
How Occurrence Policies Work
Here’s an example of occurrence policies in action:
You’re a plumber with an occurrence-based professional liability insurance policy in place for the duration of your career. Upon retirement, you let your plan lapse since you no longer need coverage.
Unfortunately, two years later, a former customer sues you for a major leak in their home. The good news is that since you had occurrence coverage in place when you worked for them, your insurance carrier likely covers the incident.
Occurrence policies create fewer gaps for professionals or small business owners. However, since they are more open-ended with their coverage, these types of policies often cost more.
For instance, if a malpractice policy for an anesthesiologist costs $35,000 a year for an occurrence policy, that same level of coverage in a claims-made policy might be $12,000 the first year, and $33,000 when the policy matures in four years. There are greater savings early on, which can be helpful for professionals who are just getting started.
Now that you know more about these two types of coverage, you may be wondering which one is best for you. To help you decide, here’s a quick look at the pros and cons of each.
Pros and Cons of Claims-Made Insurance
- Less expensive, at least initially
- Can extend coverage with an extended reporting period (ERP) or retroactive date
- May only be covered for a limited period
- More complicated to keep track of
Claims-made policies are a good fit for many businesses, and often cost less during the first few years. However, since premiums often go up annually with this type of policy, you won’t see the cost savings forever. You also have the flexibility to extend your policy’s effectiveness with nose and tail coverage.
Since these policies often have a limited period for filing claims, you may find yourself without coverage if someone takes their time to file a claim. And because you have to pay attention to the retroactive dates and extended coverage options, these policies can get complicated.
Pros and Cons of Occurrence Insurance
- Covers claims that don’t get filed right away
- Simple to move from one insurance carrier to another
- Often cost more
- Not available for every type of policy
Many business owners prefer the peace of mind that an occurrence policy can provide. No matter how long it takes for a claim to get filed, you’re covered as long as the event triggering the claim happened during your policy period. And since these plans don’t require a tail, they’re often easier to move from one insurer to the next.
However, some carriers don’t give you the option of an occurrence policy for certain types of insurance, like professional liability and employment practices liability insurance. You’ll need to check with your insurance broker to see what your options are.
Which Type of Policy Should You Get?
Insurance isn’t a one-size-fits-all type of purchase. You likely already have claims-made policies for some insurances and occurrence for others. You can check by reviewing your policy’s declaration page, insuring agreements, or exclusions and endorsements sections.
Is one type better than the other? Not necessarily. Both types of policies provide financial protection for you against claims meeting the policy’s requirements. However, depending on your business needs, one type might be a better fit.
For instance, if you're in an industry where claims are often filed years after an incident occurs, occurrence policies might make more sense. But, if you don’t anticipate that happening, claims-made policies might offer enough protection and save you some money. Your insurance broker can also help shed light on which type of policy may work better for your situation and give you some tips on risk management.
No matter which policy you go with, make sure you sign up for liability coverage right away. Inception and retroactive dates often limit time frames in which prior acts are covered, so the sooner you sign up, the better protected you’ll be.