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Claims Made Vs. Occurrence Policies: What are the Impacts?

When it comes to a claims made versus an occurrence policy, which is better? The answer isn’t that easy, as both claims made and occurrence based policies are beneficial in different ways and depend on insurance needs.

In general, a claims made policy only covers incidents which are reported during the period of its coverage. An occurrence policy, on the other hand, offers lifetime coverage for incidents occurring during the period of the policy, even after the policy has expired.

Read on to learn more about each policy type for business insurance, and how each impacts your company.

Claims Made Policies Explained

Claims made policies are more common with certain types of liability policies written by insurance companies. With a claims made policy, the insurance company will cover claims made and reported while the policy is active.

Claims made policies were developed because of the long tail nature of some types of liability coverage such as medical malpractice. Unlike a property claim where the damages are often immediate, a malpractice claims can be discovered years (or even decades) after an event occurs. As a result, it can be difficult for an insurance company to price and rate risk appropriately if old policies have claims many years after they are issued.  

For the insured, it is important to maintain an active policy while there is still potential for a claim to arise. If the policy is canceled at any point and a claim is made after the cancellation date, the insurance company will not cover the claim, even if it occurred on a previous date while the policy was active. For example, if a doctor has a claims made malpractice liability policy active from 2004, but the policy ends in 2008, the insurance company will not cover claims reported after expiry even if the incident that gave rise to the claim occurred during the policy period. Following from the example above, a claim filed in 2009 for an incident which occurred in 2005 would not be covered.

When a claim is filed outside of the policy period of a claims made policy, the company or individual who the claim is filed against will be responsible for paying for the damages that occurred—which can be quite costly.

It is very important that any claims discovered during a policy period are reported immediately, and certainly before that policy expires or coverage could be jeopardized as a result of a late report.

Additional Features Available for Claims Made Policies

Although a claims made policy may seem restrictive, there are some advantages, such as the fact that they are typically lower premium policies.

Claims made policies also have optional add-ons that can be selected to make them more attractive to buyers.  These add-ons sometime include an additional premium, but in the event of a claim, can be worth the extra premium.

Retroactive Date: Remember that a claims made policy covers claims reported while the policy is active regardless of when the event that gave rise to the claim occurred. An exception to this is when a retroactive date is in place.  The purpose of a retroactive date is to eliminate coverage for claims produced by incidents that took place prior to a specified date.   However, from your company’s perspective, this can provide coverage for a period of time before the policy is active.  In this case as long as the incident that gave rise to the claim occurs on or after the retroactive date and the claim is filed after the policy begins, the claim would be covered.

A company can, for example, purchase a policy starting January 2022 with a retroactive date of April 2019. This retroactive date provides the company coverage if a claim is filed in April 2022 for an incident that occurred in April 2021, even though the policy did not officially begin until January 2022.

Retroactive dates are often the inception of the first policy purchased, but some policies have no retroactive date meaning claims from any prior events will be included in coverage, subject to other policy terms and conditions.

Extended Reporting Period: Once a claims made policy expires, it will no longer cover incidents which occurred during the lifetime of the policy, unless an period to extend claims reporting is added.

Many insurance companies will allow an extended reporting period to be added after their policy expires. Sometimes this may also be referred to as tail coverage and it allows for claims to be filed after the expiration of a claims made policy.

It is important to remember that this extra reporting period is only available for events which occurred while the policy was active. If a claim is filed for an event which happened during the extended reporting period and the company did not purchase a new insurance policy, they are considered to be uninsured and this claim will not be covered.

Need help selecting a claims made policy and add-ons your business may need? Axxima can help evaluate the risks involved in your business and select the right level and fit of coverage for your business.

Occurrence Insurance Policies Explained

Unlike a claims made policy, occurrence based insurance policies will cover claims that happen during the time which the policy is active, regardless of when they are filed. Because these policies allow claims to be covered for so long, they can be more expensive. 

Basically, if a hospital has an occurrence insurance policy active from 2004-2008, the insurer will cover a claim during these dates even if it is filed in 2022. It will not, however, cover occurrences which occurred before and after the policy was in place. Because occurrence insurance policies allow claims to be filed for such a long period of time, tail coverage is not needed.

Which Type of Insurance is Better?

Both claims made and occurrence insurance policies have their pros and cons. Sometimes both types will be available for purchase. Which type  is right for your business will depend on several different factors.

Cost of Premiums

Because of their period of coverage, claims made policies can be cheaper to purchase than occurrence based policies. Saving money on the cost of insurance can be important when a business is just starting out, but less important for a more established business.

Cost isn’t everything however, and some businesses find the risks associated with the lower cost claims made policies are not worth the discount in premiums.

Future Insurance Purchase Plans

It is important to know what type of policy you have, particularly if you are switching types. When you have an occurrence policy, it is very easy to switch to another occurrence policy. If a company starts with a claims made insurance policy however, they may find it difficult to switch to an occurrence policy later as claims from older years may not be picked up.

It may also be difficult for a company to switch from one claims made policy to another depending on the retroactive dates and reporting periods offered. Switching from one claims made policy to another makes it much more likely for a company to experience a gap in insurance, even if it is only for a period of days.

Type of Insurance Required

Unfortunately, a company seeking a specific type of insurance may be limited in their option of type of policy. Some insurers only issue certain types of insurance in one policy type or the other.

For example, it is common for commercial general liability insurance to be offered as an occurrence policy. Not all companies are alike however, so it is helpful to shop around if you would like a specific type of insurance with a preferred policy type.

Businesses also require numerous different types of insurance and while some types are better covered with occurrence based insurance, others may be more beneficial as a claims made policy. The pros and cons for each insurance policy held by a company should be discussed with an advisor before purchase.

Ease of Use

Occurrence policies tend to be easier to manage as the insured party doesn’t have to worry as much about keeping the policy active in the future, or feeling locked into a certain policy—as the company will always be covered for events that happened while the policy was active even if they occur many years down the road.

With an occurrence policy, knowing your business is covered for years down the road can take a huge weight off the back of a company. Plus the company is free to switch to a different occurrence based policy later without having to worry about a lapse of coverage.

The exact type of insurance policy each company needs will vary based on the size of the company, the amount of cash they have available to spend on a policy, and the unique needs of the company. It is recommended to schedule a consultation with a risk management advisor to discuss the needs of your business before you select an insurance policy.

Making the Final Insurance Policy Choice

Overall, the type of insurance policy that is a good fit will vary from business to business. While some may like the ease of knowing how coverage is applied with an occurrence policy, others may benefit with a claims-made policy.

Regardless of the type of insurance you are looking into purchasing for your company, it is essential that you discuss your options with an advisor before you purchase. Call Axxima today to set up a consultation to review the best types of insurance and coverage your company needs!

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