Claims-made vs. occurrence insurance policies: What you need to know

The nitty, gritty, need-to-know details about how your business insurance policy responds to claims during and after your policy period and what this means for you.

If you’re researching insurance policies for your small business, the phrases “claims-made policies” and “occurrence policies” might be confusing. Put simply, they’re broad terms for the two different ways that business insurance providers handle claims, dates, and coverages. The crucial difference comes down to the timeline for reporting a claim.

We know this type of granular insurance terminology can leave your head spinning. That’s why we’ve laid out the essentials in layman’s terms below.

The basics: Events & claims

There are two key terms that make the difference when sorting out claims made vs. occurrence: an event and a claim.

  • Event – the technical term for an accident, incident, injury, or anything covered by insurance
  • Claim – the filing you submit to your insurance to let them know that the event (accident, injury, etc.) happened

So we’ve got our two key factors—what happened (the event) and when someone tells you about the event (the claim). But how do these factors impact your policy? At the simplest level:

  • Claims-made policies are dependent on (get this) when the claim is made against you.
  • Occurrence policies are dependent on when the event occurs.

Let’s dive into the details on claims made vs. occurrence insurance.

What is a claims-made policy?

A claims-made policy covers events that are made against during the time your policy period is active. The moment you deactivate your policy or it expires, you’re no longer covered under that policy.

Any claim that someone makes against you after the policy expires or events/claims made before the date your coverage starts, are not covered.

As such, to be covered, you need to meet two conditions:

  1. The policy is active while the claim is made.
  2. You have kept the policy active (extended or renewed the policy) from the time when the incident happened up until the claim was made.

Even if an event occurs outside of when the policy is active, the claim must be filed during the policy period and sent to the insurer during the policy period OR reporting period in order to be paid.

Claims-made policy example: Say you have a long-term client that you’ve been working with since the start of your business in 2010. In 2015, your company scaled heavily, and only then did you decide to purchase professional liability insurance. You’ve kept the same insurance active since then, and now (in 2020) this long-time client chooses to sue you for work that occurred in 2018.

In this case, you’d be covered because you meet the two criteria:

  1. The policy is current (as of 2015).
  2. The event that caused the damage you were being sued for happened after your policy started in 2015.

But, if you were sued for work that happened in 2014, you wouldn’t be covered, since you didn’t yet have the insurance policy (it started in 2015).

Claims-made policy note: It is important to note that many claims made policies are “claims made and reported,” meaning that the claim must both be made and reported to the insurer within the policy period or any applicable reporting period. Technically these can be different dates, as there could be some delay between the claim coming to the attention of the insured or the lawsuit being brought and the insured reporting it to the carrier.

What is an occurrence-based policy?

An occurrence-based insurance policy depends on when the event occurred. In a nutshell, you are covered for incidents that occur when the policy is in effect, even if the claim is made after the policy period has ended.

The policy in force at the time the bodily injury or property damage “occured” will respond to the claim, provide the defense and pay damages, as long as the claim is not otherwise excluded or coverage limits exhausted.

Summary: A claim can be made against you after your original policy has expired; it’s just addressed by your current insurance instead.

Occurrence-based policy example: Let’s return to our previous example, this time with an occurrence-based policy in mind.

This long-standing client of yours was injured in 2017. Although it was your fault, this client shrugged it off and didn’t sue because you had a great relationship. After your business venture ended in 2019, you canceled your policy, and in 2020, this client decides to sue for medical expenses for the long-forgotten injury of 2017.

With an occurrence-based policy, you would be covered because the injury occurred while your policy was active. In contrast, with a claims-made policy, you would not be covered, because the policy wouldn’t be active at the time of the claim.

Key detail: The retroactive insurance date

In the insurance industry, the retroactive date refers to the date your policy starts to respond to events, which is often before you actually bought the policy. Any event occurring before the retroactive date will not be protected by that policy, leaving you responsible for the damages.

Say you purchased small business insurance March 1st, and the retroactive date was February 1st. If a loss occurred from an event that happened prior to February 1st, such as on January 28th, you would not have coverage for a claim under your current policy.

Even if the policy does reach back a little, it’s still not the best game plan to wait to buy auto insurance until after you get into an accident. Insurance is all about being proactive, not reactive.

If it’s your first policy, the retroactive date is the date your policy starts (again, not necessarily the same day you clicked ‘Purchase’).

Note: If you’ve had another professional liability insurance policy or several policies in the past, you need to make sure that your new insurance company acknowledges your earliest retroactive date, in order to demonstrate that you’ve had continuous coverage.

Understanding the difference between policy limits

Insurance policies usually have a stated amount of coverage. So, the amount of protection you purchase is the amount you have for the duration of your coverage.

For example, if you invest in a 2-year, $2M policy and are sued for claims that totaled $2M within the first year, those claims were successful, and the insurer paid that amount, then you will no longer be able to get another claim paid if it is made in that policy period. A policy’s aggregate limit restarts each year that it’s active, but if your policy expires and is not replaced, you will not have coverage for any claim that is made for anything you have not already reported to your insurer.

Again, a policy’s aggregate limit restarts each year, but always not for the period still left to report claims for your last policy.

For instance, you purchase an occurrence-based general liability policy that lasts 2 years with a $2M limit. You’re sued for $2,000,000, the claims are successful, and the insurer pays all the way up to the full $2M limit of your policy. While you can’t make another insurance claim, next year, your aggregate limit renews and you’ll be insured for another $2,000,000.

Who needs coverage?

If you’re reading this, you do (probably). As a small business owner or independent contractor, you have a lot on the line. Unlike large corporations, you’re left to deal with every small detail of running and growing the business on your own. While juggling several roles and responsibilities, a lot can slip through the cracks. And even a small claim can set you back financially and take up a lot of time you could have spent working on your business.

Ultimately, any business would benefit from a business insurance policy. Anything from a displeased client, slight slip-up, or random accident can render you defenseless against costly and timely lawsuits. Don’t leave you, your business, or your reputation at risk.

Do you need a claims-made or occurrence policy?

The type of coverage that is best-suited to your business needs will vary based on the specific risks of your profession and what is offered by the insurance provider. Below are the main takeaways when it comes to cost to help you when you have a choice. 

Before we dive in, remember:

  • Claims-made: the claim must be made against you while the policy is active.
  • Occurrence-based: the event must happen while the policy is active.

Claims-made policies

Tend to have cheaper premium options but may be unfavorable if you have several large claims or if you wish to cancel or switch to an occurrence-based policy.

Benefit: Cheaper premium options – Typically, a claims-made policy will have a lower initial premium. The price tends to increase the longer you have your policy in effect. This could cost you even more later if you decide to cancel or change to an occurrence policy.

Occurrence-based policies

Typically offer continued coverage, increased peace of mind, and better flexibility to make modifications from the insurer.

Benefit: Continued coverage – Should you choose to switch insurers, you are still covered for previous work that occured while you had a policy in place.

Summary

If you have an option, you have to consider your business and its needs. For newcomers to business management, the lower-cost claims-made policies might be an appropriate option, especially if you maintain continuous coverage without cancellation.

Note: if you later replace a claims-made policy with an occurrence policy, there may be gaps in coverage. However, for larger businesses with more risk, the higher cost of an occurrence policy may be worth the increased amount of liability coverage.

Business insurance that works for you

At Thimble, we believe that occurrence policies tend to be more favorable to small business owners. As such, for policies arranged by Thimble, you don’t have to decide on whether or not your policy is occurrence-based or claims-made. To keep it simple, Thimble’s liability policies are all occurrence polices.

Additionally, protection for covered claims that arise after the policy period from work completed during the policy period—also known as products and completed operations coverage—is provided as long as the occurrence takes place before the Exposure Period ends. The work must have been completed during the policy period for coverage to apply.

Our affordable professional liability (also known as errors and omissions insurance) and general liability policies are tailored to you and your business. Most importantly, you can choose coverage by the hour, day, month, or year. It’s business insurance that works when you do.

You’ll also be able to choose between $1M and $2M policy limits. While the difference in coverage is double, the price increase between the two is often negligible.

Just like breaking down complex insurance terms like claims-made vs. occurrence insurance, we believe in making business insurance radically simple.

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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