What Is Occurrence Insurance Also Known As?
Demystify occurrence insurance. Discover how this liability policy works, focusing on when the covered event occurred.
Understanding the various types of liability insurance is an important aspect of managing financial risk for individuals and businesses. Among the primary forms of coverage, occurrence insurance stands out due to its distinctive approach to how and when claims are covered. A clear grasp of this policy type is necessary for policyholders to ensure adequate protection against potential liabilities.
Alternative Names for Occurrence Insurance
Occurrence insurance is frequently referred to as “occurrence form” or “occurrence-based policy.” These terms emphasize its core characteristic: coverage is triggered by the date the incident or event “occurred,” rather than when a claim is reported.
Understanding Occurrence-Based Coverage
Occurrence-based coverage provides protection for incidents that happen during the policy period, regardless of when a claim is actually filed. This means that even if a policy has expired or been cancelled, a claim arising from an event that took place while the policy was active will still be covered. For instance, if a business had an occurrence policy in effect when a customer was injured, that policy would respond to a claim even if the claim was reported years after the policy ended.
This type of insurance is well-suited for “long-tail” liabilities, where injury or damage may not become apparent until a significant amount of time has passed. Examples include claims related to environmental pollution, product liability, or construction defects. Commercial General Liability (CGL) policies are commonly written on an occurrence basis, providing broad coverage for bodily injury and property damage incidents.
An occurrence policy includes specific financial limits. A “per occurrence” limit sets the maximum amount the insurer will pay for any single event, while an “aggregate limit” establishes the total maximum payout for all covered occurrences within a specific policy period. Because coverage is tied to the date of the incident, occurrence policies do not require an extended reporting period, often called “tail” coverage, once the policy expires.
Distinguishing Occurrence from Claims-Made Policies
Differentiating occurrence policies from claims-made policies is important for understanding liability coverage. The primary distinction lies in the trigger for coverage. While an occurrence policy covers incidents based on when the event happened, a claims-made policy provides coverage when the claim is first reported to the insurer, provided the event occurred on or after a specified “retroactive date” and the claim is reported during the active policy period.
The retroactive date is a key element of a claims-made policy, establishing the earliest point an incident can occur for coverage to apply. If an event takes place before this date, the claims-made policy will not cover the resulting claim, even if reported during the policy period. This date remains consistent as long as the policy is continuously renewed, ensuring coverage for past acts from that date forward.
A practical implication of claims-made policies is the need for an Extended Reporting Period (ERP), also known as “tail coverage.” If a claims-made policy is cancelled or not renewed, an ERP allows claims to be reported for incidents that occurred during the policy’s active period and after the retroactive date, but are only reported after the policy has ended. This optional extension is purchased for an additional cost and does not cover new incidents occurring after the policy’s termination. Without an ERP, a claims-made policy ceases to provide coverage for any claims reported after its expiration, even if the underlying incident happened while it was active.
Claims-made policies are commonly used for professional liability insurance, errors and omissions (E&O) insurance, and directors and officers (D&O) insurance. These types of coverage involve liabilities that might not surface until long after the professional service was rendered. In contrast, an occurrence policy offers permanence; the policy in effect at the time of the original incident remains responsible, simplifying future claim handling regardless of subsequent policy changes or retirement.