What Is the Difference Between Claims-Made and Occurrence?

Insurance policies are structured in different ways, dictating when and how coverage is activated. Understanding these structures is crucial for individuals and businesses to select appropriate protection and avoid potential gaps in coverage. Recognizing these mechanisms helps ensure a policy aligns with specific risk exposures and coverage needs. This knowledge allows for more informed decisions when selecting or renewing insurance, helping policyholders avoid potential gaps in coverage.

Occurrence Policy Coverage

An occurrence policy provides coverage for incidents that happen during the policy period, regardless of when a claim is actually reported. The fundamental principle is that the event causing injury or damage must occur while the policy is active. This means that even if a claim is filed years after the policy has expired, coverage can still apply as long as the triggering incident took place within the policy’s effective dates. This characteristic offers long-term protection against liabilities that may manifest over an extended period.

For instance, a commercial general liability (CGL) policy is typically written on an occurrence basis. If a customer slips and falls at a business location in 2023, and the business has an active CGL policy that year, the policy would cover the resulting claim even if the customer does not file a lawsuit until 2025. This structure simplifies coverage for “long-tail” claims, where the effects of an incident or injury may not become apparent until much later.

Claims-Made Policy Coverage

A claims-made policy, in contrast, provides coverage when a claim is made against the policyholder and reported to the insurer during the policy period. This means that for coverage to apply, both the alleged incident and the subsequent claim reporting must occur within the specified policy period. If the policy expires or is canceled, any claim made afterward, even if the incident occurred while the policy was active, may not be covered without specific extensions.

Professional liability insurance, also known as errors and omissions (E&O) coverage, commonly operates on a claims-made basis. For example, if an architect has a claims-made professional liability policy from January 1, 2024, to January 1, 2025, and makes a design error in February 2024, coverage would only apply if a claim related to that error is also made and reported to the insurer during that same policy period. Should the policy expire on January 1, 2025, and a claim for the February 2024 error is filed in March 2025, the policy might not provide coverage.

Distinguishing the Coverage Triggers

The core difference between occurrence and claims-made policies lies in their coverage triggers. An occurrence policy is triggered by the date the incident or injury occurs. If the damaging event happened while the policy was in effect, coverage is generally available, regardless of when the claim is reported. This provides enduring protection for events that may lead to claims many years in the future, such as environmental contamination or certain professional liabilities.

Conversely, a claims-made policy is triggered by the date the claim is first made against the insured and reported to the insurer. For coverage to be active, the claim must be reported during the policy period, and often the incident must have occurred on or after a specified retroactive date. This distinction is important for risks where a significant delay can occur between an event and the resulting claim, such as in medical malpractice or professional errors.

Key Features of Claims-Made Policies

Claims-made policies often include specific features like a retroactive date and an Extended Reporting Period (ERP), also known as “tail coverage.” A retroactive date is a specified date in a claims-made policy that limits how far back an incident can occur for coverage to apply. If an incident happens before this date, even if the claim is made during the active policy period, it will generally not be covered.

An Extended Reporting Period (ERP) or “tail coverage” is an optional extension that allows claims to be reported after a claims-made policy has expired. This is crucial when a claims-made policy is canceled or not renewed, as it provides a window, typically ranging from 1 to 5 years or even unlimited, during which claims for incidents that occurred before the policy expired can still be reported and covered. Without purchasing ERP, a policyholder could face a significant gap in coverage for past acts once their policy term ends. The cost of tail coverage can vary but is often a percentage of the expiring policy’s premium, increasing with the length of the reporting period.