Almost all liability insurance is either claims made coverage or occurrence based coverage. Most general liability insurance policies for businesses are occurrence based policies, while errors and omissions (E&O) coverage is typically claims made.
There are a few simple but significant differences between these policies that you should understand.
When looking at claims made versus occurrence policies, the main differentiator is the time period covered.
An occurrence based insurance policy protects you from claims resulting from any incident that occurred during the policy period, regardless of when the claim was filed. It’s permanent coverage for a certain time period, so long as the incident falls within the terms of your policy (we’ll come back to this “little” detail later).
A claims made policy, on the other hand, provides coverage for claims only if both the incident and the claim occur during the policy period. If you renew the same policy year after year, claims are accepted as far back as your retroactive date, also known as a prior acts date or “nose.”
If you started your policy in 2014 and constantly renewed up to the present, your retroactive date means that you are covered against any claims from 2014 to the present. If your policy lapsed at any point, your retroactive date resets to when you reactivated your policy.
When you cancel your policy, you can purchase a “tail” endorsement to provide extra coverage. A tail, or extended reporting period (ERP), is basically an extension of when a claim can be filed, but the incident still had to be while the policy was active.
A tail just gives you a bit more flexibility if someone is slow filing a claim against you. Short-term tails are often provided at no cost to you, as a courtesy. Long-term or perpetual tails are also purchasable for a premium, which varies based on the insurer.
Claims made vs. occurrence insurance policies are also differentiated by their limits.
Occurrence based policies have a limit that restores each year regardless of claims paid. Each year of an occurrence based policy is a separate set of limits unrelated to the year before or the year after.
For example, your general liability policy aggregate limit is $1M. In 2016, a claim was made against you and your insurance company paid out $200,000. Your 2017 aggregate limit will still be $1M. It doesn’t carry year to year.
Claims made policy limits do not “restore” each year like occurrence policies. You have one policy limit for as long as you keep your policy active, whether that is one year or ten.
For example, you have a claims made professional liability (E&O) policy with a $2M aggregate limit. You’ve been carrying this policy since 2010. In 2011, a claim was filed and $300,000 was paid out. Your limit from 2011 until your terminate this policy will be, maximum, $1.7M.
How does this work with completed ops coverage?
When hearing about occurrence based policies, you may be wondering where your completed operations coverage comes into this. Completed operations coverage is like a mini claims made policy inside an occurrence based insurance policy. The occurrence aspect of the policy only applies to active projects.
Let’s try to make this simple…
- If a project is underway, your occurrence-based general liability policy covers you.
- If the project is over, you have completed ops coverage and your policy is still active, you’re covered.
- If the project is over, you have completed ops coverage but your policy has lapsed, you’re only covered if the incident occurred with the policy was active AND you have a tail.
- If the incident occurs after the policy period, you’re out of luck.