Claims-Made vs. Occurrence Policies

When it comes to buying insurance for your business, not knowing the difference between claims-made and occurrence plans can be an expensive error. Getting a claims-made or occurrence policy will have a significant impact not just on the cost of your coverage. But also, on the lifecycle of your coverage. Professional liability and directors and officers policies are often claims-made policies, whereas most general liability policies are occurrence policies. Let’s take a closer look at what these two terms mean for you and the coverage you’re buying.

Occurrence Policy

An occurrence policy will cover claims for acts or incidents that occurred while your coverage was active. Even if your insurance expired or you canceled it, if the event occurred during the policy period, the claim would be covered. Because of the length of coverage, these policies can be more expensive than claims-made policies.

Claims-Made Policy

A claims-made insurance only provides coverage if you file a claim within the policy period. Your insurer will provide coverage if an insurable event occurred after the policy’s retroactive date. A claims-made policy covers claims made while your insurance is still in effect. You will be uninsured if you terminate your policy or if you fail to pay your premiums and the insurer cancels it. D&O insurance is a common type of claims-made coverage, as is professional liability insurance, commonly known as E&O or malpractice insurance.

Medical malpractice insurance, for example, is frequently offered as a claims-made policy due to the high related expenses. But it may have lower average premiums than if offered as an occurrence-based policy. You have the option to purchase an extension for “tail coverage.” This is an addition to a claims-made policy that will expand your contract to include incidents that took place while your policy was active, even if the claims are submitted after your policy has expired. It should be noted, however, that this add-on only covers a limited time. Usually up to 3-5 years after the insurance expires.

Retroactive Date

Our policy covers incidents that occur on or after a specific date. Assume you have professional liability insurance on a claims-made basis. Your coverage begins in January 2024 and is retroactive to November 2019. If a client sues you in February 2024 for an incident that occurred in December 2019. Your insurer may be able to assist in covering the claim because it occurred after your retroactive date and the claim was reported during your policy period.

Extended Reporting Period

This helps to cover claims filed after your coverage has expired for a defined period of time. It usually lasts between 30 and 60 days. So, if your insurance expires in December 2024 and you have a 60-day extended reporting period. Your insurer may be able to assist you in covering claims made during this time period. This is also referred to as tail coverage.

Limits

When it comes time to buy your insurance coverage, you must decide on an aggregate limit. An aggregate limit is the highest amount of coverage that an insurer is willing to pay for the total amount of compensated losses during the policy period. In essence, you should consider how much coverage you wish to have.

Occurrence Limits

Policy limits apply only to situations that fall within the designated policy term. Only claims generated by events occurring during the policy term and eventually paid will count towards the available policy limits. It is important to remember that defense costs are normally covered outside of the policy limitations and have no bearing on the amount of insurance offered. Occurrence insurance limits, on the other hand, will be reset every year upon renewal.

As a result, if your limit is $1 million and $500,000 in claims were paid during the previous policy year, your renewal limit will be $1 million as well. However, you would still have $500,000 remaining on the last policy year for any later claims. As a result, you may have policy limits available for future use to insure previously unknown claims.

Claims-Made Limits

The essential factor in calculating claims-made limits is whether or not the policy covers earlier acts. Furthermore, unlike an occurrence policy, these insurance contracts usually include defense costs up to the set limit. As a result, as policies renew, the policy limit might be extended to cover longer periods of time than the standard 12 months. And defense costs will reduce the available insurance. As a result, if you buy a $1 million claims-made policy and pay $500,000 in claims that year, any future claims reported after the expiration date should be covered by the subsequent renewal via a Full Prior Acts Endorsement or a Retroactive Date Endorsement.

As a result, your renewal policy limit would cover both the prior policy’s past unknown claims as well as any events that occur during the current year. In this regard, your current claims-made insurance protects you for a period of more than a year. Unlike an event policy, the expired policy does not provide any residual limits to cover you from prior incidents. You must use your current policy limit to cover any unknown historical claims. However, if you obtained “tail coverage” under your expired insurance, your past claims would be addressed while your current policy limit would be unaffected.

Claims-made plans often establish premiums for the following policy year’s claims, however an occurrence contract will price for both current and future year claims. As a result, you should examine the premium dynamics listed below:

Step Rates

In the case of claims-made, both the event and the reported claim must occur during the coverage period. This indicates that the risk of loss in the first year of the policy is relatively low, and so the first-year premiums for claims-made coverage are often lower. As you renew your insurance policy, the period of coverage is extended through a Full Prior Acts or Retroactive Date endorsement, exposing the insurance company to extra risk. Because prior actions are included, premiums will change incrementally over the first four years of a claims-made policy, which is known as the claims-made step factor.

Mature Rates

By the fifth year of claims-made coverage, the risk of loss should have leveled out, indicating that the claims-made step factor has matured. Mature claims-made rates and regular occurrence coverage rates end up costing around the same.

Advantages and Disadvantages

Even when you understand the benefits and drawbacks of claims-made and occurrence plans. It’s difficult to prove that one is superior to the other. The truth is that the only way to decide which type to purchase is to determine which one best meets the needs of your company.

Convenience

One of the primary benefits of occurrence plans is that they need less work to own and manage them. This implies that if you change insurance companies, you won’t have to worry about being covered for incidents that occurred while you were insured by someone else.

If you transfer insurers or cancel your insurance, policies become a little more difficult. If you do decide to transfer carriers you must get a Retroactive Date or a Prior Acts Endorsement. As well as maybe “tail coverage” to protect yourself. On the other hand, if you do nothing, any past claims that arise will be lost, and you will be uninsured.

Coverage

Occurrence plans also provide better peace of mind because the limit is only imposed for a 12-month period. On the other hand, because it may apply to many years of risk, your limit may be exhausted sooner.

Cost

As we’ve noted above, claims-made policies are cheaper than occurrence policies. This is because occurrence policies still cover claims even after the insurer has stopped receiving premiums. So, the more expensive premiums help make up for the money an insurer may have to pay out for a future claim. With claims-made policies, you’re actively paying premiums when the insurer is taking on the risk.  So, it costs them less and in turn costs you less.

Working With EZ

We understand that there is a lot to learn while shopping for commercial insurance. However, the effort spent studying is worthwhile. Getting the correct type of insurance for your business can make the difference between safeguarding it and losing everything you’ve worked for. Keep in mind that you don’t have to go it alone – EZ.Insure is here to assist you. Throughout the shopping experience, we focus on each customer individually and provide a helpful environment. To get a quote enter your zip code in the bad below. We want to assist you in making the best decision and saving the most money. There is no bother, no obligation to purchase, and no more worries. Best of all, everything is absolutely free. Call one of our agents immediately at (855) 694-0047 to get started.