With certain types of insurance, consumers have access to two basic forms of business coverage options. Business owners can select either claims-made or occurrence. The only distinction between the two is how their coverages are activated.
What is Claims-Made Insurance?
The idea behind a claims-made insurance policy is to cover incidents that you report during the active policy period. Sometimes it can even be over an extended reporting period or occur after a policy’s retroactive start date. Any claim processed under this form of coverage must meet specific protection criteria to apply.
Defining a retroactive date is an excellent place to start to understand the concept of a claims-made form better. A retroactive date is a specific date a policy coverage begins. Typically, the insured agrees upon the policy’s effective date or past date. Should an incident occur before the retroactive date, it will not be covered.
A prime example of a claims-made form is when a small company owner purchases a general liability policy. If on a claims-made basis, the policy starts on Jan. 1, 2022, and ends on Dec. 31, 2022. However, it had a retroactive date of Oct. 1, 2021. A claim can be reported during the policy period for a loss that may have occurred on Nov. 10, 2021. The claim is covered with the incident being reported during the policy period and occurred after the retroactive date. If the incident happened before Oct. 1, 2021, the claims-made coverage wouldn’t apply.
Under claims-made policies, there is also an extended reporting period, otherwise known as tail coverage. By definition, an extended reporting period is a provision on a policy that further extends the amount of time you can report a claim after policy cancellation. More times than not, a policy will include tail coverage; however, the length of time varies depending on the insurance provider.
Advantages of Claims-Made Insurance
Consumers can benefit from quite a few advantages of claims-made insurance, the first being that policies are generally less expensive. Claims-made providers can more accurately predict the frequency and severity of claims reported during the period. Also, claims-made insurance policies are based on a step-rated process, so there are no additional cost savings during the first years of claims-made and reported coverage. Those who continuously remain insured under this type of policy will be covered for any new claims that arise from services provided since the retroactive date.
What is Occurrence Insurance?
In contrast to claims-made insurance, consumers may prefer occurrence insurance. This form of insurance covers losses during a specified coverage period. The significant part about occurrence insurance is that it offers coverage regardless of when an incident is reported.
The example provided is a simple way to explain how occurrence insurance works. For instance, say you have an electrician who decides to purchase a general liability policy on an occurrence basis. If the policy is effective on Jan. 1, 2022, running through Dec. 31, 2022, and a claim is reported against the electrician in Feb. 2023 for shoddy work completed during the policy period in Oct. 2022, the claim is covered. The coverage results from the loss having occurred during the policy period.
Granted, occurrence policies are usually more expensive than claims-made policies since there isn’t a limit on the time a claim must be filed.
Advantages of Occurrence Insurance
Anyone who is interested in learning about the benefits of occurrence insurance will be pleased to know that several unique benefits are associated with this policy. One of the most notable advantages of occurrence insurance is the idea of long-term protection. With a typical occurrence policy, for example, medical professionals maintain coverage for past events during their policy.
Another area where occurrence insurance thrives involves fixed premiums. The cost of a premium depends on the insurance company; medical professionals can expect their premiums to remain constant through an occurrence policy.
Occurrence policies cover policyholders well after they stop paying for protection, which makes it easier for professionals to be covered if they move or start a new job. If you purchased a claims-made policy, you would need to purchase tail coverage along with the current policy for total coverage.
Who Benefits from Claims Made Insurance?
As previously mentioned, claims-made insurance policies are commonly used to protect against risks related to business operations. Such policies are used in collaboration with errors and omissions. They are also used to handle business claims made by employees that include wrongful termination, sexual harassment and discrimination.
Insurance companies are held to a high standard to defend the policyholder and pay for claims. The policy will include a specified period for when coverage applies and any claims made during that time.
Who Needs Occurrence Insurance?
If your business doesn’t invest in claims-made insurance, it should seriously consider the alternative of occurrence insurance. If your business has commercial general liability insurance coverage on an occurrence form and during the policy period a customer falls and breaks their arm, the claim is covered.
Even if the customer doesn’t report the injury until, say, a year after your policy expires, you are still protected. It is helpful to keep in mind that you do not need tail coverage if you already have occurrence insurance. You will likely end up paying more for occurrence insurance, though. Evaluate your needs for the business and make your decision from there on purchasing occurrence insurance.
Compare Business Insurance
Insurance companies like The Hartford, Simply Business, Coverwallet and B2Z are among the most useful and best for claims-made insurance. The Hartford is best known for comprehensive coverage and business owner’s policies. Simply Business rates are high for tailored coverage, while Coverwallet is best for start-ups, self-employed and small businesses. Finally, with B2Z, you can expect quality coverage for all your one-stop-shop needs.
Getting the Coverage You Need
Few people purchase claims-made insurance. The driving force behind this choice is the reasoning that many believe they won’t need protection. No matter though, claims-made insurance is critical protection to maintain. Benzinga offers advice and suggests consulting with a local insurance carrier to see if they can help you decide exactly how much protection you need for you and your organization. You never want to find yourself with little to no coverage.
Frequently Asked Questions
Which is better claims-made or occurrence?
A claims-made insurance policy offers protection whenever a claim is made against a company or professional. It works in your favor when a request for reimbursement is filed long after the initial incident. The caveat with this, though, is you are only covered as long as the incident took place while the claims-made insurance policy was active. If canceled, the claim isn’t covered unless the business purchased additional coverage.
Occurrence-based insurance protects the company and provides reimbursement for any incidents within a policy lifetime. Additional coverage may not be required, though, especially during a limbo period while transitioning to another insurer’s policy.
How does claims made insurance work?
The purpose behind claims-made insurance tends to be a little more complex than occurrence insurance policies because of tail coverage and retroactive dates. Only claims made during your policy period are covered under claims-made insurance. It isn’t necessary to determine when the bodily injury or property damage took place most of the time. One of the significant parts about claims-made insurance is that your claims today are covered by the policy you currently have. You are given the benefit of investing in policy limits related to the current economic and legal environment in which you operate your company.