What Is the Difference Between Claims-Made & Occurrence Coverage?

Understanding the structure of an insurance policy is important for individuals and businesses seeking financial protection. Policies are contracts designed to shield against unforeseen events and liabilities, but their effectiveness hinges on how and when coverage is triggered. Grasping these mechanisms helps policyholders make informed decisions, ensuring their protection aligns with their risk exposures and avoids potential coverage gaps.

Understanding Occurrence Coverage

Occurrence coverage protects against incidents that happen during the policy period, regardless of when a claim is reported. The “occurrence”—the event causing damage or injury—is the sole trigger for coverage. This means if an incident took place while the policy was active, the policy will respond, even if the claim is filed many years later. This structure provides a form of lifetime coverage for events that transpired within the policy’s effective dates.

For example, a commercial general liability policy often operates on an occurrence basis. If a customer slips and falls at a business in 2020, and the business had an occurrence policy then, that 2020 policy would cover the claim. This holds true even if the customer does not file a lawsuit until 2023, long after the 2020 policy period ended. The policy active when the injury occurred is the one responsible for responding to the claim.

Occurrence policies are particularly beneficial for situations where the harm caused by an event might not become apparent until much later. This includes scenarios involving gradual exposure to harmful conditions, such as environmental contamination, where injuries or damages may manifest years or even decades after the initial incident.

The limits of liability under an occurrence policy reset with each new policy period. For instance, if a business has a $1 million limit per occurrence, that limit is available for each policy year a covered event takes place. This annual reset provides substantial long-term protection against multiple incidents over time, benefiting businesses with prolonged liability exposures.

Understanding Claims-Made Coverage

Claims-made coverage provides protection when a claim is first made against the policyholder and reported to the insurer during the policy period. For coverage to apply, two conditions must be met: the claim must be reported while the policy is active, and the incident must have occurred on or after a specific “retroactive date” and during the policy period. The policy in effect when the claim is reported is the one that responds.

Professional liability (E&O) and directors and officers (D&O) liability insurance are common examples of claims-made policies. These are structured this way due to potential delays between when an error occurs and when a claim is filed. For instance, if an architect makes a design error in 2020, but a claim isn’t filed until 2023, the architect’s 2023 claims-made policy would potentially cover it, provided the incident occurred after the policy’s retroactive date.

A defining feature of claims-made policies is their reliance on continuous coverage. If a claims-made policy is canceled or not renewed without further provisions, any claims reported after its expiration for incidents during the policy period would not be covered. This highlights a potential exposure for policyholders who discontinue their coverage without understanding the implications.

Unlike occurrence policies where limits reset annually, aggregate limits in claims-made policies apply to all claims reported during the policy’s lifetime or a specific policy period, rather than resetting each year. This can impact the total coverage available over time, especially for businesses with a history of claims or those in professions with long “tails” of liability. Understanding these nuances is important for maintaining adequate protection.

The Role of Reporting Periods in Claims-Made Policies

Claims-made policies introduce specific considerations regarding reporting periods. A central concept is the “retroactive date,” a specified date in the policy that limits coverage for past incidents. An incident must have occurred on or after this date for any subsequent claim to be covered. This prevents coverage for liabilities from events that took place before the policyholder acquired the claims-made coverage. For example, if a policy has a retroactive date of January 1, 2015, claims reported for incidents occurring before that date would not be covered.

Maintaining continuous claims-made coverage is important, as any gap can create significant uninsured exposures. If a policy lapses and is reactivated or a new one purchased, incidents from the original policy’s active period reported during the gap or after a new policy’s later retroactive date may not be covered. This highlights the need for careful management, especially when switching insurers or careers. When changing insurers, transferring the original retroactive date to the new policy is often possible, ensuring continuous coverage for prior acts.

When a claims-made policy is terminated, standard coverage for future claims ceases. To address this potential gap for incidents that occurred while the policy was active but not yet reported, policyholders often need an “Extended Reporting Period” (ERP), known as “tail coverage.” Tail coverage is an endorsement that extends the timeframe for reporting claims related to incidents from the original policy’s active period, even after the main policy expires.

There are two types of extended reporting periods: basic and supplemental. A basic ERP is automatically provided by insurers for a limited duration after a policy is canceled or not renewed, allowing for immediate claim reporting. For longer-term protection, a supplemental ERP can be purchased. These optional extensions can range from one year to several years, or even an unlimited duration, depending on the insurer and policy type.

The cost of supplemental tail coverage is a one-time payment, calculated as a percentage of the final annual premium, commonly ranging from 150% to 300%. For example, a policy with an annual premium of $10,000 might incur a tail coverage cost between $15,000 and $30,000. Factors influencing this cost include the profession’s risk level, claims history, and the desired duration. Purchasing tail coverage is a strategic decision for professionals leaving practice, retiring, or switching to an occurrence-based policy, ensuring protection against past liabilities.