From workplace injuries to property damage, from cyber liability to employee fraud, your business faces plenty of risks. Insurance plays a key role in helping you manage these risks and cover losses. All property and casualty (P&C) insurance policies fall into two categories: occurrence policies and claims-made policies. The type of coverage you have matters, as it determines the following:
- Whether or not your policy will respond to a claim
- What your company’s responsibilities will be in the event of a claim
- How much your premiums will cost, both now and in future renewal periods
Understanding the basics of occurrence and claims-made policies will ensure you have the coverage you need.
The majority of P&C insurance policies are occurrence policies, which tend to be the less complicated of the two types of coverage. An occurrence policy covers any instance of bodily injury or property damage that happens within your policy period, regardless of the date you submit the claim. This means you could potentially submit a claim years after your policy period ended, as long as the event that triggers the claim occurred during your period of coverage.
One advantage of having this type of policy is that the period of time you are insured is protected “forever” by the occurrence policy you had that year. When your policy period has ended, there is no need to renew the policy or purchase “tail coverage” (explained later in this article) to cover events from your policy period. As a business owner, if you face the risk of unknown or unreported claims arising long after your policy period is over, an occurrence policy might be right for you.
Manifest versus exposure: An interesting provision to look for in occurrence policies, as it pertains to bodily injury claims, is the concept of “manifest” versus “exposure.” There is a growing realization and understanding of the dangerous effects of long-term exposure to toxins, such as asbestos, cadmium, crystalline silica and more. Regarding an occurrence policy, the question is whether bodily injury occurred when the injury “manifested” itself or occurred when the injured party was first “exposed” to the toxin. How an insurer defines occurrence may differ from carrier to carrier, so make sure to discuss this with an insurance professional.
Claims-made policies tend to be more complex than occurrence policies because factors such as “tail coverage” and retroactive dates come into play. Claims-made policies only cover claims made during your policy period; it’s unnecessary to determine when the bodily injury or property damage occurred.
What’s advantageous about this type of policy is that your claims today are covered by the policy you have today. This gives you the benefit of purchasing policy limits that correspond with the current economic and legal environment in which your business operates.
The disadvantage of a claims-made policy is that if you or the insurer cancels or does not renew the policy, you will have no coverage for claims made after the cancellation or non-renewal date for injuries or damage that occurred prior to that date. This is where purchasing the “tail coverage” would be necessary.
Tail coverage: A “tail,” also known as an extended reporting period (ERP), is coverage you can purchase to cover claims after your policy expires. Tail coverage is purchased to go along with a claims-made policy; with occurrence policies, an ERP is already built in.
With tail coverage, you can report claims for incidents that occurred during the period you had your claims-made policy, but the key is that you are able to report the claims after your policy expires.
Retroactive date: If you make a claim during your current policy year, it will be charged against your claims-made policy, even if the injury or loss occurred years ago. However, it’s important to be aware that if your policy has a retroactive date, only occurrences after that date will be covered. Keep in mind that most claims-made policies have a retroactive date.
Which Policy is Right for You?
To determine if an occurrence or claims-made policy is right for your business, consider the following:
- Premium cost: Typically for the first five years of coverage, claims-made policies tend to be less expensive than occurrence policies. Keep in mind that as your business faces more exposures, your premiums will increase; usually after five years, the cost of a claims-made policy begins to even out with occurrence policies.
- The amount of coverage: A claims-made policy covers your claims at your current coverage level; whereas, an occurrence policy covers you at the amount of coverage you had during your policy year. If your occurrence policy period was years ago, your coverage level can be quite a bit less than today’s coverage level, due to inflation and the rising cost of claims.
- The type of business: When determining what policy you need, consider your line of work. If you anticipate future claims arising out of the current business transactions you have with your customers, an occurrence policy might be best for you.
This article covers just the basics of the two types of insurance policies. The insurance professionals at ECG INSURANCE can provide you with more detailed information, and can help you find the policy that’s right for your business.
All P&C insurance policies fall into two categories: occurrence policies and claims-made policies. Understanding the basics of each will ensure you have the coverage you need.