Insurance - Claims Made vs. Occurrence Policy

Insurance can be complicated, especially for the business that is trying to decide what type of policy to get. There are two main types of policies, claims made and occurrence. Both have their advantages and disadvantages so its important to understand the difference between these two policy types.

Most people are used to the basic occurrence policy. This policy has a term period, typically six months or a year, though it can also be much longer. The insurance contract will specify a start and end date for the coverage. This policy will cover losses that occur during the designated policy period, according to the policy's terms and conditions. Regardless of when a claim is made, if it occurs during the policy term, coverage is in effect.

A claims made policy, on the other hand, is driven by when the claims are made. Any loss made is covered per the terms and conditions unless there is a retroactive date that prevents coverage for claims that occurred before that date. Thus, a valid claims made policy can process a claim made today for an occurrence from five years ago, as long as there isn't a retroactive date that precludes it.

With an occurrence policy, you can make a claim even years later for something that happened during the policy period. There's no need to worry about the coverage being denied because it isn't renewed or a carrier switch was made. It's all governed by the policy period. In contrast, if a claims made policy is canceled, it may be difficult to purchase coverage for past events in part or entirely.

A disadvantage to having an occurrence policy is that the limits might prove to be inadequate. If a claim is made ten or fifteen years after the fact, there's actually a good chance that the policy limits won't be enough to cover the costs. The claims made policy, however, because it's negotiated today, is more likely to have better limits set. This is actually the big advantage of a claims made policy - the ability to have coverage limits that are appropriate for the day. In fact, if switching from an occurrence to a claims made policy, inadequate limits can be fixed because the retroactive date of the claims made policy can go back beyond the old occurrence policy. Indeed, there may not even be a retroactive date included in the new claims made policy.

So, claims made coverage is can be extremely broad in terms of time, depending on the retroactive date, if there is on, while an occurrence policy is very defined, with a loss having to have occurred during a stated period of time. With an occurrence policy, the date of the incident is the key, while with a claims made policy, it's the date the actual claim is made, subject only to a retroactive date, that matters.