When you purchase an insurance policy such as Professional Liability Insurance, it’s often described as a “claims-made” policy. What does that mean? And how is it different from an “occurrence” policy? Great questions! Keep reading to find out.
Claims-Made vs. Occurrence Insurance Policies
What is a “claims-made” policy?
With a claims-made policy, for a claim to be covered it has to be reported during the policy period (i.e., the active life of a policy). In other words, your coverage must be active both when the alleged incident occurs and when the claim is filed.
Say you have a Professional Liability policy that's active from January 1, 2016 to December 31, 2016. Then the following happens:
- You create an app for a retail client in October 2016.
- On January 1, 2017, you don’t renew your Professional Liability policy.
- On January 15, 2017, you find out that you’re being sued by the client because technical problems with your app have prevented sales and driven customers away.
- You file the claim to your insurance company that same day, hoping to get coverage for legal costs associated with the lawsuit. But your claim isn’t covered because you filed it after the policy period ended.
In the above example, though the incident itself occurred during the policy period (the incident being your construction of the app in October), the claim did not. For the claim to receive coverage, it had to have been reported before the end of 2016, when your policy expired.
However, all is not lost: let’s take that exact same example but assume that you do renew your policy come January 1, 2017. In most cases, as long as you’ve had continuous coverage between the incident and the claim, your policy will offer coverage.
What is an “occurrence” policy?
With an occurrence policy, coverage is triggered if the events causing a claim occur during the policy period. The claim can happen after the policy period has ended. Using the above example, if your policy was an occurrence policy, your claim on the January 15, 2017 could have been covered, even if you hadn’t renewed the policy.
Think of an occurrence policy working in this way: you must have an active insurance policy in place when an incident happens, even if you don't get sued until long after.
Visualizing Claims-Made Coverage
John Cross, insurance professor at California State University, Fullerton's Mihaylo College of Business and Economics (@CSUFMihaylo), helps explain the concept of claims-made insurance.
Put a line chart on a board, Cross says. This line represents the policy term. Place an “X” in the policy term where an accident occurs. Then, place another “X” where the claim is reported. If the point where the claim is reported falls somewhere on the line of the policy term, then that claim can be covered. (In the image below, this is illustrated by Incident A and Claim A.)
What if the incident occurs before the policy period?
Many claims-made policies also come with a retroactive date – the earliest point at which an incident could occur and still be covered.
“To illustrate this, I'll usually place that date to the left of the line chart,” Cross says. “Then, I am able to illustrate that with a retroactive date, essentially, both the occurrence and the claim must follow that date and the claim must be made during the policy term.” (In the image above, this is illustrated by Incident B and Claim A.)
Coverage Gaps and Tail Coverage
When switching insurance policies, it’s important to ensure your business has continuous coverage, especially with claims-made insurance. If a claim is reported between the time one policy ends and another one starts, then you’re out of luck when it comes to getting a claim covered.
Cross also points out that just because you may close your business, it doesn’t mean a claim won’t still happen. Lawsuits often are filed months – or even years – after the events that cause them.
If you’re closing your business and you had claims-made coverage, be sure that you keep that coverage extended after your business is ended. This is known as tail coverage, which you can secure with an Extended Reporting Form. Without it, you could be sued for an event that occurred months ago but not have any way to get insurance funds. The tail coverage would help for Claim B, regardless of when the incident occurred.
For more information on this potential exposure, read our article on the six things you need to check before cancelling your business coverage.