Knowing the difference between claims-made and occurrence insurance can save you from making a big financial mistake. Business owners who need help understanding the difference may learn the hard way. A key distinction is that claims-made policies include professional liability and directors & officers (D&O) insurance, while occurrence policies are broader, as they have general liability.
What Is an Occurrence Policy?
Occurrence policies only cover claims while the policy term is in effect, regardless of whether or not you renewed or canceled the plan. It may cover incidents during the policy term but wasn’t reported until after it expired.
What Is a Claims-Made Policy?
A significant difference between claims-made and occurrence insurance is the former will not cover an event that occurred during a term if the claim is filed after the policy’s expiration date without a renewal. Even if you renew the coverage, you cannot file a claim for a previous 12-month policy period. In other words, a claims-made policy forces you to act more swiftly to file a claim by the policy period expiration date.
Understanding How Limits Work
Coverage limits are just as important to understand as the differences between insurance types. Every business has unique risks that point to how much insurance coverage is necessary to protect the company. You’ll need to find out your aggregate coverage limit for your firm. This value refers to the maximum amount your insurer will provide for coverage.
Occurrence limits may not be used up in a 12-month policy period, as they can extend to future periods. So if your policy limit is $500,000 and you file a $250,000 claim during the period, the remaining coverage amount can be used following a policy renewal for a later claim pertaining to the occurrence period.
Claims-made limits may cover legal defense costs, but only for the period in which the incident happened. Through a Full Prior Acts Endorsement, your claims-made policy covers both unknown historical claims from the prior policy plus incidents in the current period. You can also get this coverage extension through a Retroactive Date Endorsement.
Claims-Made Vs. Occurrence Pros and Cons
Both claims-made and occurrence insurance have their advantages and drawbacks. It’s important to at least examine what works and what doesn’t in terms of your coverage needs. One of the biggest advantages of an occurrence policy is that it’s easier to set up and maintain. It’s a seamless solution for switching insurance providers while maintaining the same coverage. A claims-made policy, by contrast, is more complicated when switching carriers.
In terms of premiums, occurrence policies tend to cost more because they take into account future claims for past policy periods. In that sense, an occurrence policy provides more coverage than a claims-made policy. But claims-made policy premiums usually only have cost advantages the first few years of the contract. After about the first five years, a claims-made policy will typically be about the same cost as an occurrence policy.
Learn More About Which Policy Is Right for Your Business!
In many ways, occurrence policies offer greater peace of mind than claims-made policies, but it really depends on your business risks. At J. Archer Insurance Group, we offer occurrence insurance and claims-made coverage based on your firm’s coverage needs. Contact us today to learn more about your business insurance options.