California Commercial Insurance: Claims Made vs. Occurrence Policy’s

Posted on November 16, 2010


One of the most important considerations to keep in mind when purchasing commercial insurance is deciding whether a “claims-made” or “occurrence” policy makes the most sense for your particular business.  Every business is unique in regards to potential risks that may arise out of normal business operations.  Identifying what those risks are and when they are likely to arise in the form of a claim or lawsuit is very important in determining whether a claims-made or occurrence policy makes the most sense for your operation. 

Basically, a “claims-made” policy provides coverage for claims made against your business as long as the policy is still in force when the claim is made (or tail coverage has been purchased) and the policy has continuously been renewed without a lapse in coverage (or a current policy is in force with full “retroactive coverage” covering prior acts).  The “retroactive date” is the start date for coverage on a claims-made policy.  If you decide to switch insurance companies, it’s very important that your new policy provides coverage for “prior acts” back to the retroactive date of your first policy (full prior acts coverage) to avoid a gap in coverage.   Conversely, an “occurrence” policy covers all claims that occurred during the policy period, regardless of when the claim is reported or whether or not the policy is still in force.  While there are pro’s and con’s to each policy form, one of the more obvious factors to keep in mind is that a claims-made policy may leave you exposed to future claims if you cancel your policy and do not purchase tail coverage after the expiration of your policies extended reporting period or another claims-made policy that provides full retroactive coverage.

Claims-Made

Pro’s

Perhaps the most widely acknowledged benefit to a claims-made policy is the cost, which can be as much as 50% less than a similar occurrence form policy.  This lower initial cost can amount to a very substantial savings over time.  Another less apparent benefit typically occurs over time as claims-made policy coverage’s are sometimes broadened to address evolving business exposures that were either unknown or uninsurable in prior years or decades.  If you’re current claims-made policy provides broader coverage’s and full prior acts coverage back to the retroactive date of your first claims-made policy, the evolving nature of this policy will provide a substantial benefit not available on the more costly occurrence form.

Con’s

By far the largest knock on claims-made coverage is that it’s a pay-as-you-go policy that only provides coverage as long as premiums are continuously paid.  This policy requires the purchase of tail coverage in the event you discontinue insurance coverage for any reason and you wish to remain insured against residual claims.  Tail coverage is often expensive and may need to be purchased long into the future in the event the risk of costly claims remains present.   If the nature of your business presents risks that surface years or decades into the future, or potentially well beyond the life of your business, it may make sense to consider paying the extra premium for an occurrence policy.

Occurrence

Pro’s

The simplistic structure of occurrence policies makes them very convenient.  Insurance is provided for the period in which insurance is purchased and claims arising from that time frame are covered regardless of when the claim is actually filed or whether or not the policy is still in force.  The simplicity of this policy form reduces the headache of purchasing tail coverage indefinitely on a claims-made policy or worrying about potential gaps in coverage that may void claims-made coverage.

Con’s

The more obvious downside to occurrence form policies is their increased cost, but there are a few other detrimental factors that are less apparent to consider as well.  As mentioned earlier, claims-made policies are sometimes broadened and their coverage limits increased over time.  In contrast, occurrence form policy’s that become a decade or two old can potentially have less broad coverage’s and lower policy limits as inflation slowly erodes their real value.  Occurrence policies cannot be updated retroactively and the diminishing real value of their coverage limits may prove to be inadequate against the growing size of future claims.  With this in mind, it’s advisable to purchase an occurrence policy with greater limits than are needed today to provide adequate claims coverage in the future.  Another factor to consider is that in order for an occurrence policy to provide coverage for claims well into the future, the insurance company providing the policy needs to remain in business.  With this in mind, it’s a good idea to purchase occurrence form policy’s from the highest rated insurance company’s that exhibit long, and stable financial history’s.  It should be noted that occurrence form policies are somewhat less common than claims-made policy’s, so policy availability may also play a role in the insurance options available to your business. 

Conclusion

The need for both claims-made and occurrence policies arises for many reasons.  At times, the liability exposures of many businesses can present unique risks for insurance companies that could be responsible for huge claims in the future that may not be accurately predicted or priced by current underwriting capabilities.  A great example comes from asbestos, which for most of the last century was used in everything from car brakes to home insulation products before it was found to be a highly toxic carcinogen.  Insurance companies that wrote insurance policies covering manufacturers of asbestos products decades ago had no way of knowing or pricing insurance policies to cover the avalanche of claims that would come in later years.  Claims-made and occurrence policies offer insured’s as well as insurance companies a viable means of affordably mitigating catastrophic risk.

Deciding on whether a claims-made or occurrence policy makes the most sense for your business is not an easy or straight forward process in most situations.  It will require careful planning and should be done with the help of a skilled insurance advisor.  If you have not updated your commercial insurance lately, now would be a great time to do so.

Jeremy Schaedler

El Dorado Hills, California

Share

Advertisements