Claims-made Policies vs Occurrence Liability

professional and general liability policies cover claims that are based on the time an incident occurs and the date a claim is filed. What triggers coverage is the difference. An occurrence policy, on the other hand, requires that coverage be in effect when an incident occurs.

What is a Claims-made policy?

A claims-made insurance policy provides coverage for liability protection to a company, but only if the claim was made after the policy was in effect. Retroactive coverage can be provided if the policy is still in force at the time of the claim or during its extended reporting period.

The Pros and Cons of Claims Made Liability Policies

PROS CONS
Retroactive coverage Confusing
Coverage gaps are prevented Not as often offered
Insurance provides peace of mind

Retroactive Dates for Claims-Made Policies

A claims-made policy’s retroactive date means that coverage begins at a date before the policy was paid for and taken into effect. A policy could be issued to a company that has been without insurance for six consecutive months. The policy will be effective if they receive it on July 1, 2021. The policy can be claims-made with a retroactive six-month date. This would cover claims that were made after January 1. This would mean that the company would have removed the coverage gap for incidents that occurred before the policy was bought.

Extended reporting periods for claims-made coverage

Professional liability policies allow you to extend the period during which you can file an claim. This is as long as the claim occurred while the policy was in effect. An accountant might have an errors and mistakes policy until he retires. If someone files a claim for work done before retirement, he can add an extended reporting period (ERP), to his policy. This would allow him to keep the coverage in effect for up to five years.

How policy limits based on claims are implemented

The policy’s claims-made coverage is based on the principle that the coverage will last longer than the policy term. The insured receives additional protection by retroactively covering events that occurred before the insurance company established a relationship. Extended reporting periods are also available for claims that can be filed after the policy term has ended or is not renewed.

 

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Example of Commercial General Liability Coverage for Claims Made by Claims

A professional liability policy covers an architect from January 1, 2020 through December 31, 2020. This policy is claims-made and has a longer reporting period. He takes a break from work to deal with a family matter and does not renew his policy. A March 2021 client who hired him to design a house discovered that the design had a problem that caused a threshold to collapse. Although the architect no longer holds a valid insurance policy, the extended reporting period and a claim filed three months after the policy expired cover him for the loss.

What is Claims-made or Reported Coverage?

A claims-made and reported policy is different from an extended reporting policy. The claim must be made and reported to the insurance company while the policyholder still has a valid liability policy. It can be difficult to file a claim after a policy period ends.

What is an Occurrence policy?

An occurrence policy permits the policyholder to file a claim for loss no matter when it is made, as long as the loss occurred during the policy’s term. Because it does not limit the time that a claim can be filed, an occurrence policy can cost more than a claims-made one. It can occur one month, one or 10 years after the loss.

The Pros and Cons of Occurrence Based Liability Policies

PROS CONS
Flexible claim-making period More expensive
Some incidents are covered by indefinite protection There is no prepolicy protection
Straightforward policy

How the Occurrence Policy Limits Works

The general liability insurance limits apply only to the policy term. Any claim that was made after the expiration of the policy would be covered by the remaining coverage. Imagine that the prior policy had a $100,000 per-occurrence limit and an aggregate of $300,000. If you have not paid any claims during the policy term, the claim cannot exceed the per-occurrence limit. You would be out of luck if you have exhausted the aggregate.

Keep in mind that general liability insurance covers legal fees. Usually, defense costs are covered beyond the policy limits. You will need to verify this. They must be within acceptable limits or your per-occurrence value and aggregate value will get eaten by defense costs.

Example of Occurrence General Insurance Coverage

An occurrence type policy of general liability is available to a store owner. He has $100,000 per-occurrence limits and a $300,000. aggregate limit. His policy covers March 1, 2021, through February 28, 2021. A customer slips in his shop on January 20, 2021. A customer is taken to hospital with a fractured hip. There are complications after the surgery. The customer’s daughter files a claim for her on March 30, 2021. The claim does not apply to the current policy term, but to the prior term. The injury coverage will cover $100,000, plus any legal fees.

How to choose between Claims-made and Occurrence Liability insurance

It is important to know the differences between claims-made insurance and occurrence insurance so that you can choose the right policy for your company. The occurrence policy is more expensive, and therefore likely to be prohibitive if cost is a significant factor. The occurrence policy can be a good choice if you want coverage for any incident that occurred while your policy was in effect. A claims-made policy that has a retroactive period is a good option for newer businesses who might not have had general liability insurance.

Bottom line

It is crucial to know when and how your coverage will be effective before you buy general liability or professional liability insurance. There are many ways to get coverage before you purchase insurance, and also ways to protect yourself after your policy has ended. This will protect you financially from any claims that may arise even if there is no policy. Discuss your needs with your agent and determine which policy is right for you.

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