What Is the Difference Between Occurrence and Claims-Made?

Insurance policies serve to protect individuals and businesses from unexpected financial losses. While they all aim to provide a safety net, policies vary significantly in how coverage is activated. Understanding these differences is important for ensuring adequate protection. This article will clarify two common types of liability insurance: occurrence policies and claims-made policies.

Understanding Occurrence Policies

An occurrence policy provides coverage for incidents that take place during the policy period, regardless of when a claim is reported. The trigger for coverage is the date the incident or injury occurred. This means that if an event happens while the policy is active, coverage applies even if the policy has since expired or been canceled when the claim emerges years later.

This type of policy offers long-lasting protection. For example, if a covered event occurs in 2020 under an occurrence policy, and a claim related to that event is filed in 2025, the 2020 policy would respond. Common applications include commercial general liability insurance and auto insurance, where incidents are discrete events.

Understanding Claims-Made Policies

A claims-made policy operates differently, providing coverage for claims that are first made and reported during the active policy period. The incident triggering the claim must also have occurred on or after a specified “retroactive date.” The primary trigger for coverage is thus the date the claim is reported, not necessarily the date of the incident itself.

The “retroactive date” establishes the earliest date an incident can occur and still be covered. If an incident happened before this date, the policy will not provide coverage, even if the claim is reported during the policy period. This date remains consistent as long as the policy is continuously renewed.

When a claims-made policy is canceled or not renewed, an “extended reporting period” (ERP), also known as “tail coverage,” may be necessary. This additional coverage allows for claims to be reported after the policy has ended, provided the incident occurred during the original policy period and after the retroactive date. ERPs are important for professional liability insurance, such as errors and omissions (E&O) or directors and officers (D&O) liability, where claims can arise long after services were rendered.

Core Differences in Coverage Trigger

The fundamental distinction between occurrence and claims-made policies lies in how coverage is triggered. For an occurrence policy, the factor is the date the incident or injury takes place. As long as the covered event occurs within the policy’s effective dates, the policy will respond, even if the claim is reported years or decades later.

Conversely, a claims-made policy requires that the claim be first made and reported during the active policy period for coverage to apply. An additional requirement is that the incident must have occurred on or after the policy’s retroactive date. This means that for a claims-made policy, both the timing of the incident and the timing of the claim report are paramount.

Practical Implications of Policy Type

The differing coverage triggers of occurrence and claims-made policies have practical implications, particularly concerning “long-tail” claims. These are claims that emerge long after the triggering event, such as those related to environmental damage or professional malpractice. An occurrence policy inherently handles long-tail claims effectively because coverage is tied to the date of the incident, not the claim date.

For claims-made policies, managing long-tail exposures requires careful planning. If an insured changes insurance carriers or retires, a gap in coverage can occur for incidents that happened under a previous policy but are reported later. To address this, an extended reporting period (ERP) or “tail coverage” is purchased. This ensures that claims arising from past acts, reported after the policy’s cancellation, still receive coverage. Without tail coverage, an insured could be exposed to significant liability for past professional services or actions.