Claims made в страховании

Claims-Made Policy

What Is a Claims-Made Policy?

A claims-made policy refers to an insurance policy that provides coverage when a claim is made against it, regardless of when the claim event occurred. A claims-made policy is a popular option for when there is a delay between when events occur and when claimants file claims. However, the policy only covers claims made while the policy is active. Businesses often carry claims-made policies or occurrence policies, which extend coverage for claims made on inactive policies if claim events occurred when the policies were active.

Key Takeaway

Understanding Claims-Made Policies

A claims-made policy is a type of insurance policy most commonly used to cover the risks associated with business operations. For example, these policies are often used to cover the potential for mistakes associated with errors and omissions (E&O) in financial statements. They are also used to cover businesses from claims made by employees, including wrongful termination, sexual harassment, and discrimination claims.

Claimants may make claims against a policy months after the claims’ event takes place. This type of liability is referred to as employment practices liability and may also cover the actions of directors and officers of the business.

Insurance companies may also offer claims-made and reported policies, which most find less desirable than a standard claims-made policy because claims must be reported during the policy period to be covered. This reduces the amount of time that a business can expect to be covered, which can be a problem in situations when many months pass between the claim event and the claim filing.

Claims-Made vs. Occurrence

Nearly all liability policies fall into one of two categories: claims-made or occurrence.

A claim made while the policy is in force triggers coverage for a claims-made policy. The insurance company is obligated to defend the policyholder and pay for the claims. The insurance policy will include a specified period in which coverage applies, and any claims made during that time are covered under the policy. This type of trigger is different from an occurrence policy, which is based on the time in which the claim event occurred since the occurrence policy trigger only covers claims that come from incidents that fell during a specified period. Occurrence policies don’t specify when the accident must take place, as long as the injury or damage it causes occurs during the policy period.

Difference Between Claims-Made and Occurrence Policies

Claims-Made Coverage Usually Costs Less

There are two basic types of commercial liability policies: occurrence and claims-made. The primary difference between the two has to do with the coverage trigger, the event that initiates coverage. An occurrence policy is triggered by an injury that occurs while the policy is in effect. A claims-made policy is triggered by a claim that’s filed during the policy period.

Most general liability and commercial umbrella insurance is written on occurrence policies. Conversely, errors and omissions (professional liability) insurance is usually written on claims-made policies.

Occurrence Coverage

Most small businesses purchase a general liability policy like the standard ISO liability policy. It covers claims seeking damages for bodily injury or property damage caused by an occurrence.   It also covers claims alleging personal and advertising injury caused by an offense. Claims or suits are covered if the alleged bodily injury, property damage or offense occurs during the policy period. 

Many other types of liability insurance are written on occurrence forms. Examples are auto liability and employers liability. The liability section of the standard business auto policy covers bodily injury or property damage and associated pollution costs caused by an accident.   For the injury, damage or costs to be covered, the accident must occur during the policy period.   Similarly, the employers liability section of the standard NCCI workers comp policy covers bodily injury by accident if the accident occurs during the policy period. Bodily injury by disease is also covered if the last day of the employee’s last exposure to the disease-causing conditions occurs during the policy term. 

The primary advantage of occurrence policies is that they cover claims filed during the policy period or anytime thereafter. As long as the triggering event took place during the policy period, any claim that results should be covered. The timing of the claim doesn’t matter.

Occurrence policies are particularly valuable for covering product liability, environmental liability, occupational disease, and other long-tail liability exposures.

Claims-Made Coverage

A claims-made policy covers claims made against an insured during the policy period. Coverage is typically triggered when the insured receives notice, during the policy period, that a claim has been filed. The injury that led to the claim may have occurred during the policy period or before the policy inception date.

A coverage gap can occur if a business switches from claims-made coverage to an occurrence policy. The claims-made insurance won’t cover claims made after the policy expires. Such claims won’t be covered under the occurrence policy either if they arise from events that took place before the occurrence policy began.

Fortunately, businesses insured under claims-made policies can obtain coverage for future claims by purchasing an extended reporting period (also called an ERP or «tail coverage»). An ERP usually applies for a specific time period (such as three years) but is sometimes unlimited.

Some claims-made policies include a retroactive date, which serves as a cut-off point for covered incidents. It excludes claims arising from incidents that occurred before the retroactive date.

If you switch from one claims-made policy to another, your retroactive date should remain the same. Otherwise, you’ll will lose coverage for claims arising from events occurring between your old retroactive and the new one.

Cost of Coverage

One advantage of claims-made coverage is price. If two policies provide the equivalent coverage but one is claims-made and the other is occurrence, the claims-made policy is usually cheaper. This is especially true during the first few years of claims-made coverage.   The following example demonstrates why this is the case.

Smith Inc.’s premium will rise again when its liability policy renews for 2022-2023 policy term. That policy will cover claims arising from events occurring over a three-year period (2020-2023) if such claims are made during the 2022-2023 policy term. Smith’s renewal premiums will rise every year until, say 2027. At that point, Ideal Insurance will decide that no more claims will arise from events that occurred in 2020 and will stop including a charge for such claims in renewal premiums.

Claims made vs. claims occurring

Whether a policy pays out will depend on many things, including the period of time it covers. An insurance policy is typically valid for 12 months – so surely the period of time it covers is obvious? Not so! Policies can be written on two bases – ‘claims made’ or ‘claims occurring’, sometimes also ‘claims arising’ or ‘losses occurring’.

What is a ‘claims made’ policy?

A claims made policy will pay out for any valid claim made during the (typically 12-month) policy period, regardless of when the incident or alleged breach of duty actually occurred. This would be typical of a professional indemnity policy – it means all your work is covered as far back as the start date of the policy or the retroactive date, if your policy has one (here’s an explanation of what a retroactive date is). Depending on your retroactive date, this could mean your current claims made policy could cover you for claims made during the policy period which arise out of work you have done over many years.

It is important to note that a claims made policy can sometimes pay out in relation to claims made after the end of the policy period – but only if your insurer has accepted a valid notification of circumstances during the policy period. This is a really important point to bear in mind, particularly if you are changing insurer. Let’s look at an example to explain how this might work.

Example

A management consultancy is in month 11 of a professional indemnity policy and becomes aware that a client is unhappy with a report they produced recommending the implementation of a new procedure. No claim has yet been made, but it’s not looking good. The consultancy learns from an external source that the new procedure it recommended was not appropriate for its client’s business sector. Although they are still trying to resolve the matter with their client, the consultancy notifies these circumstances to their insurer, OldInsure – no action is required at this time, but the risk of a claim being made in the future is accepted by the insurer.

The consultancy decides to switch insurer to NewInsure from month 1 of the next policy year. As requested during the quotation process, they notify NewInsure of the outstanding issue. This issue will now be specifically excluded by the new policy. That’s not a problem, however, as OldInsure should cover the consultancy for any claim that is made in the future relating to these circumstances as the policy responds to “claims made” after expiry of the policy period where they arise out of a valid notification of circumstances during the policy period.

Follow this link to find out more information on PI risks that you may not have considered previously, such when you should notify your insurer of circumstances that risk giving rise to claims in the future.

What is a ‘claims occurring’ policy?

On the other hand, your policy could be written on a ‘claims occurring’ basis – meaning it will only pay out for claims that arise out of loss or damage that actually happens during the (typically 12-month) policy period. It even covers claims for loss or damage that occurs during the policy period, but does not come to light until much later.

An example of this is Employers’ Liability insurance. Businesses whose employees were exposure to asbestos many years ago, and became sick as a result were entitled to cover under their employers’ liability insurance from that time. This was in the news a few years ago when it became apparent that some employees who were suffering industrial diseases caused by work (such as those caused by asbestos) were unable to make a claim on their former employer’s claims occurring policy because the claims were made so many years after their exposure to asbestos. Either the employer or the insurer – and therefore policy records – no longer existed. A new Code of Practice (external link) was put into place to resolve this going forward and ensure it is possible to identify the right employer’s liability insurer if someone needs to make a claim in the future.

Why is it important to understand the terms of your policy?

It goes without saying that we should all read our policy documents and understand all the terms within them!

Two insurance products may both be called the same thing – for example, professional indemnity – and both be written on a claims made basis, but they may cover different things and operate quite differently. Insurers will have different wordings and approaches to notification clauses and paying claims. It is important to understand the wording used so that, should the worst happen, you will be able to claim on your policy.

If you haven’t found the information you need, visit our business insurance FAQ hub to find answers to questions on policies, quotes, and payments.

What’s the Difference Between Claims-Made and Occurrence Insurance Policies?

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As a business owner purchasing insurance for your company, not knowing the difference between claims-made and occurrence policies could prove to be a costly mistake. And whether you purchase a claims-made or occurrence policy will have a definite effect on not only how much you are paying for your coverage, but also what the lifecycle of your coverage will look like.

As far as some most common business insurance types are concerned, professional liability and directors & officers policies tend to be claims-made while most general liability contracts fall into the occurrence category.

Let’s take a look at what these two terms actually mean for you and the coverage that you’re purchasing.

What is an Occurrence Policy?

An occurrence policy will cover claims related to activities or events that occurred while your policy was in effect. Even if your policy expired or you canceled it, the claim would be covered if the event happened during the policy period. As a result, an occurrence form addresses those incidents that took place during a 12-month policy period but may not have surfaced as a claim until after the expiration date.

What is a Claims-Made Policy?

When you buy a claims-made policy, you will be covered if both the event and the claim arise while the policy is active and are reported during that time period. If you do not add the expired term to the subsequent policy period, you will lose coverage for any previously unknown claim that took place during the prior policy cycle. Therefore, all renewals must be properly structured to insure the historical business activities under a claims-made contract.

This is known as insuring “prior acts.” If this step is not taken, any coverage continuity will be severed resulting in protection gaps. Consequently, a claims-made contract must expand the coverage period and include historical events by increasing the policy term to reflect multiple years. This can be done through the use of a Prior Acts Endorsement or Retroactive Date Endorsement.

Another option you have is buying an extension for “tail coverage.” This is an amendment to an expired claims-made policy that will enhance your contract to include incidents that happened while your policy was active even if the claims are filed after your policy has expired. However, it should be noted that this is issued for a finite period of time, usually 3-5 years after the policy expires.

Understanding How Limits Work

When the time comes to purchase your insurance policy, you need to decide on an aggregate limit. An aggregate limit refers to the maximum amount of coverage that an insurer is willing to provide for the accumulation of paid losses during the policy period. In essence, you need to be thinking about how much coverage you want to have available.

Let’s take a look at the differences between occurrence and claims-made policy limits and how they work.

Occurrence Limits

Policy limits are dedicated exclusively to incidents that fall within the defined 12-month policy term. Only those claims that are triggered by events that occur during the policy term, and ultimately paid, will erode the available policy limits. It is important to note that defense costs are typically provided outside of the policy limits and do not impact the available amount of insurance. Occurrence policy limits will, however, refresh every year at renewal.

Claims-Made Limits

The key aspect of determining claims-made limits is whether the policy addresses prior activities. In addition, unlike an occurrence form, these insurance contracts typically include defense costs within the declared limit. Therefore as policies renew, the policy limit could be stretched to insure longer periods of time beyond the 12 months and defense costs would erode the available amount of insurance.

As a result, your renewal policy limit would cover both the historical unknown claims from the prior policy as well as any incidents that surface during the current year. In this regard, your current claims-made policy is protecting you for a period of time longer than 12 months.

Unlike an occurrence policy, you do not have any residual limits protecting you for historical incidents under the expired policy. You are obligated to use your current policy limit to insure any unknown historical claims. However, if you secured “tail coverage” under your expired policy, then your historical unknown claims would be addressed and your current policy limit would not be affected.

Claims-made plans typically develop premiums for the ensuing policy year claims, while an occurrence contract will price for both claims reported for the coming year as well as future years. As a result, you should consider the following premium dynamics:

Claims Made vs. Occurrence Insurance Policy: Pros and Cons

Even when you understand the advantages and disadvantages that claims-made and occurrence policies offer, it’s hard to say that one type of policy is better in any way than the other. The real truth of the matter is that the only way to decide on which type you’re going to buy is to see which one better fits the needs of your business.

Convenience: One of the main advantages of occurrence policies is that there is less work involved in owning and maintaining them. This means that if you ever switch your insurance carrier, you won’t have to worry about being covered for claims related to incidents that occurred while you were being insured by someone else.

Claims-made policies are a bit more problematic if you switch insurers or cancel your policy. If you do end up switching to a new carrier, as previously stated, you need to purchase a Retroactive Date or a Prior Acts Endorsement, or possibly “tail coverage” to protect yourself. If you do nothing, protection for any historical claims that surface will disappear and you will be uninsured.

Coverage: Occurrence policies also offer greater peace of mind since the limit is applied to only a 12-month period. Conversely, your claims made limit could be exhausted sooner since it could apply to multiple years of risk.

Cost: Even if the limits are identical, occurrence policies are providing more coverage because the aggregating limits do apply to future claims, which is why they will be more expensive. But as we mentioned earlier, once you’ve been purchasing a claims-made policy for at least five years, this new mature policy rate will probably cost as much as a regular occurrence rate.

Conclusion: The characteristics of each policy type point to the fact that there is no simple answer in choosing which route to take. Administrative efficiencies, premium costs, and residual risks all contribute to the decision-making process when comparing occurrence to claims-made policies. Compounding this further is the fact that the insurance marketplace may ultimately dictate the type of policy form that is available.

It should be stressed that all businesses have unique insurance needs and that regardless of your company’s size, nature of your operations, and maturity, you should consult with experienced insurance experts and discuss whether claims-made or occurrence insurance policies best fit your company’s risk profile and coverage needs. If you need more help or information about protecting your business, you can reach out to our team of expert brokers to learn more.

What’s the Difference Between Claims-Made and Occurrence Policies?

Katrina Chamatz / Getty Images

Marianne Bonner, CPCU, ARM, worked in the insurance industry for 30 years. Now she consults on and writes about commercial insurance.

Virtually all liability policies fall into one of two categories: occurrence or claims-made. An occurrence policy covers claims resulting from an injury or another event that occurs during the policy term. Coverage depends on the timing of the event. A claims-made policy covers claims that are made during the policy period. In this type of policy, coverage depends on the timing of the claim.

Most liability policies purchased by small business owners are occurrence policies. An exception is errors or omissions policies, which typically apply on a claims-made basis. This article will describe the key differences between claims-made and occurrence policies. For the purposes of demonstration, it will compare the occurrence version of the ISO general liability policy with its claims-made cousin.

Occurrence CGL

Most business liability policies are written on the occurrence version of the ISO Commercial General Liability Coverage Form (CGL) or on a form very similar to it. This form covers damages that you (the named insured) or any other insured becomes legally obligated to pay because of bodily injury or property damage. For a claim to be covered, the alleged bodily injury or property damage must:

Note that a claim is covered by the CGL only if the injury or damage occurs during the policy period. The policy doesn’t specify when the occurrence (accident) must take place. Thus, an occurrence may happen before or during the policy period, as long as the injury or damage it causes occurs during the policy period.

The CGL is also silent regarding the timing of claims. Claims may be made during the policy period or anytime thereafter. A key advantage of an occurrence policy is that it covers claims filed many years after the policy has expired.

Claims-Made CGL

ISO offers a claims-made version of the ISO CGL described above. In many respects, the claims-made CGL is identical to its occurrence counterpart. The exclusions, limits, definitions, and «who is an insured» sections in the two forms are very similar.

At first glance, the insuring agreements in the two forms appear to be the same. Like the occurrence CGL, the claims-made form covers damages that the insured becomes legally obligated to pay because of bodily injury or property damage. To be covered, moreover, the bodily injury or property damage must be caused by an occurrence that takes place in the coverage territory. However, the claims-made form contains two provisions not found in the occurrence form:

Characteristics of Claims-Made Policies

The paragraphs cited above demonstrate two key characteristics of a claims-made policy. First, the policy limits coverage to claims first made during the policy period. A claim is typically “made” on the date that you (or your insurer) first receive or record it. A claim made before the policy inception date or after the expiration date is not covered.

Secondly, a claims-made policy may contain a retroactive date. When a retroactive date is included, no coverage is provided for claims resulting from events that occurred prior to that date. The retroactive date is the earliest date on which injury or damage may occur and still be covered under the policy. For example, suppose you are insured under a claims-made policy that has a retroactive date of January 1, 2016. Your current policy applies from January 1, 2017, to January 1, 2018. On March 3, 2017, you receive a claim for an injury that was sustained on December 15, 2015. Because the injury occurred before the retroactive date, the claim is not covered.

The retroactive date is usually the inception date of your first claims-made policy. This date should remain the same each time your claims-made coverage is renewed. It should not be advanced (moved up) as this will reduce your coverage. When shopping for claims-made coverage, try to avoid buying a policy that includes a retroactive date. Many insurers offer policies that don’t contain this provision. 

Claim Reporting Requirements

All claims-made policies stipulate that claims must be made during the policy period. Many policies (including the ISO claims-made CGL) do not specify a time period for reporting claims. Rather, they simply state that claims must be reported as soon as practicable (or as soon as possible). These policies are known as pure claims-made policies.

Some policies are more restrictive, requiring claims to be made and reported to the insurer during the policy period. These policies are called claims-made-and-reported policies. A pure claims-made policy is preferable to one that applies on a claims-made-and-reported basis since the former affords broader coverage.

Claims-Made to Occurrence Policy

Coverage gaps may occur if you switch from a claims-made policy to an occurrence policy. The following example demonstrates why this is true.

Suppose that you are insured under a claims-made general liability policy. Your policy begins on January 1, 2017, and ends on January 1, 2018. When your policy expires, you elect to renew it under the standard occurrence-based policy. Your occurrence policy runs from January 1, 2018, to January 1, 2019.

Extended Reporting Period

The coverage gap cited above could have been avoided if you had purchased an extended reporting period. An extended reporting period or ERP extends the time period during which claims may be made and/or reported to the insurer. It does not extend your policy. A claim is covered by an ERP only if it results from an injury (or another covered event) that occurred before your policy expired.

Many claims-made policies provide an automatic ERP if your insurer cancels or non-renews your policy, replaces it with an occurrence policy, or advances the retroactive date. The automatic ERP usually applies for a short time, such as 60 days. 

Reasons for Buying Claims-Made Coverage

Claims-made policies have a number of pitfalls, so businesses typically buy them out of necessity rather than choice. Some coverages, such as employment practices liability, are available only under claims-made policies. Other coverages, like employee benefits liability, may be available on either type of form, but the occurrence version may be very expensive. Because claims-made forms afford less coverage, they are usually cheaper than occurrence forms.