Occurrence vs. claims-made insurance: Why it matters
By Harry J. Lew, Insureon Contributor
For small business owners, it’s important to understand the difference between occurrence vs. claims-made insurance before you purchase a policy.
The two policy types can affect what you pay for coverage and the life-cycle of some of the most common small business insurance coverages. For example, general liability insurance is mostly available as an occurrence policy, while professional liability, errors and omissions, and directors and officers insurance mainly have claims-made coverage.
With an occurrence-based policy, you’ll be protected as long as the loss happened while your policy was active. As long as you were insured when the incident occurred, you can file a claim with your insurer. Occurrence policies accommodate “long-tail” events – situations that don’t produce lawsuits or claims right away.
With a claims-made policy, your coverage only kicks in when you file a claim during the policy period. As long as an insurable event happened after the policy’s retroactive date, your insurer should provide coverage. With a claims-made policy, you need to have active insurance when you file a claim. If you canceled your policy – or forgot to pay your premium and the insurer canceled it – you’ll be uninsured.
Some insurers provide the option to purchase an extended-reporting period (ERP) or tail coverage for some claims-made policies. An ERP gives you the ability to file claims even though you have no current insurance. However, an ERP only applies to losses that happened during the prior policy period and for which you now need to file a claim. If a new loss occurs after you cancel your policy, you’ll still be uninsured.
Policy limits: Claims-made vs. occurrence
When you purchase a policy, you have to decide how much protection you need with your aggregate limit. This refers to how much coverage you have available for all future claims. Per-occurrence limit is the most your insurance company will pay for a given incident.
With occurrence policies, your aggregate limit resets every year. For example, let’s say you purchased a $1 million occurrence-based general liability policy. In year one, you get sued for $1 million. When your policy renews at the beginning of year two, you’ll have another $1 million of coverage to protect you.
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. For example, if you had a $1 million claims-made policy and got sued for $1 million in the first year, you would have no further protection in your policy. Unless you increase your policy limit in the second year, you would be uninsured.
Claims-made vs. occurrence: Is one policy type better?
With occurrence vs. claims-made, is one policy type better than the other? It depends on your business needs.
Occurrence-based policies are simpler to own. When you switch insurers, you’ll still have the ability to file claims on your prior work, unlike with claims-made policies.
Occurrence-based policies also offer more peace of mind since you get a new aggregate limit each time you renew your policy. This means you won’t have to worry about a large claim exhausting your limit.
Claims-made policies have lower initial premiums, but pose problems when you cancel them or switch to an occurrence-based policy.
With claims-made policies, you may run the risk of exhausting your limit if you have several large claims.
The final answer depends on what you and your business need. If you’re just starting out, you may want a lower cost claims-made policy. And if you don’t plan to cancel your policy, this may be perfect.
However, for a larger firm with more disposable cash and more assets at risk than a new firm, an occurrence-based policy may be more appropriate, even though it costs more.