OCCURRENCE vs. CLAIMS MADE
When a policy is written on a "claims-made" basis, it means that the policy in force at the time a claim against you is made will pay for losses, regardless of when the claim actually occurred in the past. (Assuming no retroactive inception date is applied, which will be explained below).
With an "occurrence" based policy, even though the policy may have expired, provided the policy was in force at the time that the claim occurred, a claim can still be made against that old, expired policy.
Both forms of coverage have advantages and drawbacks, depending on the circumstances. It is difficult to predict whether, in any particular instance, it will be advantageous to insure using one form or the other, but carriers typically offer claims made when the odds of a claim occurring over time is more likely, such as when you sell products, or have environmental exposure.
Advantages of "occurrence" policies
* - "Occurrence" policies are sometimes like "money in the bank," in that you can go back to old policies, years after they have lapsed and put a claim against them for incidents that happened while they were in force. Old policies should never be thrown away. They should be kept in a place of safekeeping.
* - You don't have to worry about canceling an "occurrence" policy and moving to a different insurer. Coverage remains locked in for incidents occurring while the policy was in force, so long as the insurer is in business. In contrast, once a "claims-made" policy is cancelled, it is possible that purchasing insurance for past events will become difficult, expensive or perhaps not possible.
* - Sometimes courts will find occurrences in successive policies if there is continuing harm. This can have the effect of accumulating limits over a period of years. With "claims-made," only one limit applies; the limit in force when the claim is actually made.
Disadvantages of "occurrence" policies
* - Insurance companies who wrote policies in previous years may no longer be around. With "claims-made" policies, the insurer is much more likely to be around when a claim becomes payable. The length of time between an occurrence and resolution in court can be 20 or more years. An insurer in business 20 years ago may not be in business today.
* - De to inflation and other economic factors, the limits on an "occurrence" policy are likely to be inadequate if a claim is made twenty years after a policy has expired. With "claims-made" it is easier to arrange a limit which is adequate for today's exposures.
Advantages of "claims-made" policies* - Limits can be predicated on today's exposures more accurately than with "occurrence" policies, so there is less likelihood of being under insured. Previous inadequate "occurrence" basis limits can be topped up retroactively.
* - Previous inadequate coverage or more restrictive terms exceptions and conditions can be broadened out retroactively.
* - The above two advantages can be made to apply whether the insured was previously on either "occurrence" or "claims-made" policies.
Disadvantages of "claims-made" policies* - Coverage is triggered by an actual claim for damages, not a notice of an "occurrence" or "incident." However, the date of the occurrence or incident must be more recent than the retroactive date of the policy. This retroactive date determines the cut-off date for claims: if the incident occurred before the retroactive date, the insurer has no obligation and the insured no coverage. While the claim has to be made during the policy period, the occurrence which gave rise to the claim has to fall after the retroactive date of the policy. A "claims-made" policy can have no retroactive date (the broadest coverage). On the plus side, a retroactive date can pre-date the policy inception date (this may range from days to years). Ideally, it should go back at least to the expiration date of your last "occurrence" policy. If it goes back further it can be designed to provide top-up cover in the case of different limits. Ideally, you want no retroactive date or one that includes the entire period that you have had "claims-made" coverage. Anything less makes you self-insured for any claims for injuries or damage that occurred during prior claims-made policy periods which you have not reported to your insurer at the time of the occurrence (unless such claims are covered by supplemental "tail" coverage).
* - The first claim for damages determines which policy applies. If a person first makes a claim for medical payments in 1986, then files for additional damages in 1988, both claims activate the 1986 claims-made policy.
With "claims-made" basis of coverage, should the policy ever be allowed to lapse or be cancelled, the insured is generally given the option of purchasing coverage, (extended reporting period or "Tail") With "occurrence" policies you don't have to worry about past incidents when lapsing coverage or changing insurers.
* - If coverage terms ever become more restrictive on subsequent renewal of a "claims-made" policy, the new terms apply retroactively to the original retroactive or inception date.
Limits of Liability and need to project into the future
* - Once an Insured is hooked on a "claims-made" policy it is difficult to get off. The Insured can purchase a "tail" coverage extension which can sometimes be extended for years, but even this is at the option of the Insurer, and is not under the control of the Insured.
There are many more complex differences to consider between these two policy types. For the sake of brevity, I have stopped short of continuing, but would be happy to continue this dialog with anyone who has more specific questions.
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Jonathan S. Carroll, ASLI, CRIS
Bradley & Parker
320 S. Service Rd, Melville, NY 11747
O - (631) 981-7600
D - (631) 650-4034
C - (917) 376-0075
F - (631) 981-7681
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