Both general and professional liability policies pay claims based on when an incident occurs and when a claim is filed. The difference is when coverage is triggered. A claims-made policy has retroactive and extended reporting periods while an occurrence policy requires that the policy be valid when the incident happens, regardless of when the claim is made.
What Is a Claims-made Policy?
A claims-made policy is an insurance policy that provides liability protection for a company based on when the claim is made, not when the policy was put in force. As long as the policy is active when the claim is made or is in its extended reporting period, there can be retroactive coverage before the policy was obtained.
Pros & Cons of Claims-Made Liability Policies
|Prevents gaps in coverage||Not offered as commonly|
|Peace of mind for insured|
Retroactive Dates on Claims-made Policies
The retroactive date on a claims-made policy means that the coverage for the policy begins on a date prior to the policy being paid for and put into effect. For example, a business might be without insurance for six months when they get a policy. If they get the policy on July 1, 2021, the policy’s effective date is July 1. If the policy is a claims-made policy with a six-month retroactive date, claims made from January 1 would be covered. This means the company would have eliminated the gap in coverage for incidents that happened before the policy was purchased.
Extended Reporting Periods for Claims-made Coverage
For professional liability policies, you can extend the time during which you can file a claim to a date after you terminated the policy coverage as long as the claim happened while the policy was in force. For example, an accountant may have an errors and omissions policy up until he retires. In case someone makes a claim for the work he did while insured prior to retirement, he could add a supplemental extended reporting period (ERP) to his policy that would last up to five years.
How Claims-made Policy Limits Work
At the crux of the claims-made policy is the fact that coverage lasts longer than the policy term. By retroactively providing coverage for events that happened before the insurance company had a relationship with the insured, the insured is afforded extra protection for when he might have been without insurance. The same holds true for extended reporting periods where claims can be made after the policy term is canceled or goes unrenewed.
Claims-made Commercial General Liability Coverage Example
An architect has a professional liability policy in effect from January 1 through December 31, 2020. This is a claims-made policy with an extended reporting period. He takes a hiatus from work to address a family issue and doesn’t renew his policy. Someone who had him design a house in March 2021 discovered a year later that there was a problem with the design that led to a collapse of a threshold. The architect no longer has a valid insurance policy but based on the claims-made extended reporting period with a claim made three months after his policy lapsed, he is covered for the loss.
What Is Claims-made and Reported Coverage?
Unlike an extended reporting period policy, a claims-made and reported coverage policy requires that the claim must be both made and reported to the insurer while the policyholder has a valid liability policy. This can be hard since it isn’t always feasible to make a claim at the end of a policy period.
What Is an Occurrence Policy?
An occurrence policy allows the policyholder to make a claim for a loss regardless of when the claim is made as long as the incident leading to the loss happens during the policy’s term. An occurrence policy is more expensive than a claims-made policy because it doesn’t limit when the claim can be made—it can happen one month, one year, or 10 years later.
Pros & Cons of Occurrence-based Liability Policies
|Flexible claim-making period||More expensive|
|Indefinite protection for some incidents||No prepolicy protection|
How Occurrence Policy Limits Work
The limits of the general liability policy apply only to the policy term and refresh every year, so a claim that occurred during the previous policy term but was reported after would be paid by any remaining coverage on the previous policy. Imagine the previous policy has a per-occurrence limit of $100,000 and an aggregate of $300,000. The claim could not exceed the per-occurrence limit and would still apply to the entire aggregate if other claims had been paid during the policy term. If you’ve used up the aggregate, you’d be out of luck for the new claim.
It’s important to keep in mind that your general liability insurance also covers the legal fees associated with the claim. Most often, defense costs are paid outside of the policy limits. However, you will want to confirm this. If they are within limits, your per-occurrence and aggregate value will be eaten by defense costs.
Occurrence General Liability Coverage Example
A store owner has an occurrence type of general liability policy. He has $100,000 in per-occurrence limits with a $300,000 aggregate limit. His policy runs from March 1 through February 28, 2021. In January 2021, a customer slips and falls in his store. The customer goes to the hospital with a broken hip and has complications with the surgery. It isn’t until March 30, 2021, that the customer’s daughter files a claim on her behalf. Even though the policyholder increased coverage at renewal to $500,000 per occurrence, this claim doesn’t apply to the present policy term but instead to the previous term. There will be $100,000 in coverage for the injury plus any legal fees associated with the claim.
How to Choose Between Claims-made vs Occurrence Liability Insurance
It’s important to understand the difference between claims-made and occurrence insurance and evaluate which type of policy makes the most sense for your business. If cost is a major factor, the occurrence policy will be more expensive and thus probably cost-prohibitive. However, if you want the benefit of having coverage for an incident that occurred when your policy was active regardless of when the claim is made, the occurrence policy is a good fit. For newer businesses that might not have gotten general liability insurance from the get-go, a claims-made policy with a retroactive period makes a lot of sense.
When buying general liability and professional liability insurance, it is important to understand how and when your coverage becomes effective. You should know that there are ways to get protection before you get insurance and ways to protect yourself long after the policy is canceled. This will ensure that you aren’t financially responsible for claims that happen when there is no policy in force. Talk to your insurance agent to see what policy is best for your type of business and your unique needs.