If your business gets hit with a claim, the insurance company will cover the claim – right? It sounds like it should be simple, but when there’s a long gap between the incident and the claim, things can get complicated.
Imagine, for example, that you’ve recently switched insurers. The claim is related to an incident that took place when the old policy was in force, but the claim wasn’t filed until the new policy was in force. So, which policy will cover the claim – the old one or the new one? The answer depends on whether you’re dealing with a claims-made or occurrence-based insurance policy.
Although these terms may seem like insurance jargon, they can have a big impact on your business. Understanding how these different policies work is an important part of making sure your business has the protection it needs.
Prompt Reporting and the Statute of Limitations
When you learn about a claim – or even a potential claim – against your business, you should report it to your insurer as soon as possible. You should report a claim the same day you first learn about it – otherwise, coverage can be jeopardized.
However, sometimes a claim might not be known immediately. For example, medical malpractice claims can be delayed if the patient doesn’t discover the injury immediately. Likewise, a general liability claim related to product liability may not arise until years after the product is sold.
In some cases, a claimant may have a limited amount of time to file a lawsuit. The length of time a claimant has to file a lawsuit will depend on the statute of limitations, and these laws vary from state to state. Other factors, including the type of claim and when the claim was discovered, can also impact the statute of limitations.
As a result, some lawsuits can be filed many years after the incident occurred. Because your business may have changed insurance policies in the meantime, this can complicate insurance coverage.
Occurrence-based insurance policies provide coverage for incidents that take place while the policy is active. General liability insurance is often written on an occurrence basis.
With an occurrence-based policy, coverage may apply for any incident that occurred while the policy was in force, even if the policy is no longer in force when the claim is reported. This can be important with types of claims that may take years to be discovered. For example, this is true with construction defect claim allegations or injuries due to other exposures that could span 10 years back or even older. The damage or injury could be alleged to have continued and worsened with each consecutive year. Each occurrence policy remains active, and each and every policy term could respond to provide coverage.
When you have an occurrence-based policy, it’s important to keep good records. To see why, suppose a business has an occurrence-based policy. Years pass. The business switches to a new insurance provider with a different occurrence-based policy, and new people take over the business operations. Then the business is hit with a lawsuit over an incident that occurred under a previous policy and while different people were in charge of the company. If the business can’t find information on the old policy, filing a claim and securing the coverage that’s owed will be difficult.
This example illustrates why you should maintain paperwork on old occurrence-based policies. You never know when you might need that information, so hold onto that paperwork.
Claims-made insurance policies are meant for claims or potential claims to be reported as soon as they are first made known within that specific policy term. It locks that claim/incident to that one policy year for coverage. However, if a notice of claim or potential claim is reported timely and within the policy term, coverage could also be triggered by litigation that arises years after the initial reporting. Reporting as soon as made aware of any potential claim or written demand is very important – if a claim is reported after the policy has ended, coverage may not be available. Professional liability insurance is often written on a claims-made basis.
A claims-made policy will typically have a retroactive date. This date establishes how far back coverage goes. This means that your policy can provide coverage for prior acts, as long as the incident occurred after the retroactive date and the claim is reported while the policy is in force. Coverage provided through the retroactive date is sometimes referred to as prior acts coverage.
Tail Coverage for Claims-Made Policies
Let’s say you have a claims-made policy for your business. When you retire, you cancel your insurance policy. After all, you don’t want to keep paying for insurance coverage for a business that you no longer have. Then you find out you’re being sued for an incident that occurred years earlier, when you were still running your business.
This is a common concern for policyholders with claims-made insurance policies. Tail coverage provides the solution. When you purchase tail coverage, you gain protection against claims that are reported after your policy has ended, as long as the incident occurred during a time period that was covered by your policy.
Tail coverage may also be called an extended reporting period because it gives you additional time to report a claim. If you are retiring, or if your claims-made policy is canceled or expires for another reason, tail coverage provides important protection. Without it, the risk of an unexpected claim can linger over you for years and years.
Claims-Made and Occurrence Coverage: Which Is Better?
There are advantages and disadvantages to both claims-made and occurrence-based insurance coverage.
Although occurrence-based coverage may sound simpler, it makes it important to keep insurance records indefinitely. Occurrence-based coverage can also be significantly more expensive than claims-made insurance coverage.
Claims-made insurance policies can create dangerous gaps in coverage. However, when continuous coverage is combined with the use of sufficient retroactive dates and tail coverage provisions, these coverage gaps can be filled in. Claims-made coverage can also be less expensive than occurrence-based coverage.
Another important issue to consider is what the insurance carrier is willing to write. Certain types of policies, such as general liability, are often written on an occurrence basis. However, other types of policies, such as professional liability, are often written on a claims-made basis. There are also many other issues to consider when looking at policies, such as the coverage limits and any exclusions in coverage.
Good coverage can be obtained through either a claims-made or occurrence-based insurance policy. However, knowing which type of policy your business has is extremely important. Once you understand your policy type, you can take steps to fill in any coverage gaps and protect your business.
Wondering which types of business insurance you need?
Contact one of our agents to review your options and understand their claims made vs. occurrence implications.