Discover the Surprising Differences Between Occurrence and Claims-Made Liability Policies in this Must-Read Guide!
Glossary Terms
| Term | Definition |
|---|---|
| Claims-made policy | A type of liability insurance policy that covers claims made during the policy period, regardless of when the incident occurred. |
| Retroactive date | The date from which coverage begins for claims-made policies. |
| Prior acts coverage | Coverage for incidents that occurred before the retroactive date. |
| Tail coverage | Coverage that extends beyond the policy period for claims-made policies. |
| Extended reporting period | A period of time after the policy period during which claims can still be made. |
| Coverage trigger | The event that must occur for coverage to be triggered under a liability policy. |
| Policy limits | The maximum amount of coverage provided by an insurance policy. |
| Aggregate limit | The maximum amount of coverage provided for all claims during the policy period. |
| Deductible amount | The amount that the policyholder must pay before the insurance coverage kicks in. |
Step-by-Step Guide
Step 1: Understand the Difference Between Occurrence and Claims-Made Policies
Liability insurance policies can be either occurrence-based or claims-made. Occurrence policies cover incidents that occur during the policy period, regardless of when the claim is made. Claims-made policies, on the other hand, cover claims that are made during the policy period, regardless of when the incident occurred.
Step 2: Know the Importance of the Retroactive Date
For claims-made policies, the retroactive date is the date from which coverage begins. It is important to note that claims made for incidents that occurred before the retroactive date are not covered unless the policy includes prior acts coverage.
Step 3: Consider the Need for Tail Coverage
Tail coverage is important for claims-made policies because it provides coverage for claims that are made after the policy period has ended. Without tail coverage, policyholders may be left without coverage for claims that are made after the policy has expired.
Step 4: Understand the Extended Reporting Period
An extended reporting period is a period of time after the policy period during which claims can still be made. This is important for claims-made policies because claims may not be made until after the policy has expired.
Step 5: Know the Coverage Trigger
The coverage trigger is the event that must occur for coverage to be triggered under a liability policy. For example, the coverage trigger for a general liability policy may be bodily injury or property damage.
Step 6: Consider the Policy Limits
Policy limits are the maximum amount of coverage provided by an insurance policy. It is important to consider the policy limits when choosing a liability policy to ensure that there is enough coverage in the event of a claim.
Step 7: Understand the Aggregate Limit
The aggregate limit is the maximum amount of coverage provided for all claims during the policy period. It is important to consider the aggregate limit when choosing a liability policy to ensure that there is enough coverage for multiple claims.
Step 8: Know the Deductible Amount
The deductible amount is the amount that the policyholder must pay before the insurance coverage kicks in. It is important to consider the deductible amount when choosing a liability policy to ensure that it is affordable in the event of a claim.
Novel Insights
- Claims-made policies can be more affordable than occurrence policies, but they require careful attention to the retroactive date and the need for tail coverage.
- Prior acts coverage is important for claims-made policies to ensure that incidents that occurred before the retroactive date are covered.
- An extended reporting period can provide additional time for claims to be made after the policy period has ended.
- The coverage trigger is an important consideration when choosing a liability policy to ensure that the policy covers the specific risks faced by the policyholder.
Contents
- What is a Claims-Made Policy and How Does it Differ from an Occurrence Policy?
- Tail Coverage: What It Is and Why You Need It with a Claims-Made Policy
- Understanding the Coverage Trigger in Liability Insurance Policies
- The Role of Aggregate Limits in Liability Insurance
- Common Mistakes And Misconceptions
- Related Resources
What is a Claims-Made Policy and How Does it Differ from an Occurrence Policy?
| Step | Action | Novel Insight | Risk Factors |
|---|---|---|---|
| 1 | Understand the difference between occurrence and claims-made policies. | Occurrence policies cover claims that occur during the policy period, regardless of when the claim is reported. Claims-made policies cover claims that are reported during the policy period, regardless of when the incident occurred. | Choosing the wrong type of policy can result in gaps in coverage. |
| 2 | Understand the coverage trigger for claims-made policies. | Claims-made policies only cover claims that are reported during the policy period. The coverage trigger is the date the claim is reported, not the date the incident occurred. | Reporting requirements are strict and failure to report a claim in a timely manner can result in denial of coverage. |
| 3 | Understand the importance of retroactive dates and prior acts coverage. | Retroactive dates determine the earliest date a claim can be reported and still be covered. Prior acts coverage extends coverage to incidents that occurred before the policy’s retroactive date. | Without prior acts coverage, claims arising from incidents that occurred before the retroactive date will not be covered. |
| 4 | Understand the importance of tail coverage and extended reporting periods (ERPs). | Tail coverage extends coverage for claims that are reported after the policy has expired or been cancelled. ERPs provide additional time to report claims after the policy has expired or been cancelled. | Without tail coverage or an ERP, claims reported after the policy has expired or been cancelled will not be covered. |
| 5 | Understand the differences in premiums and renewal processes between occurrence and claims-made policies. | Claims-made policies typically have lower premiums initially, but premiums can increase significantly over time. Renewal of claims-made policies requires the purchase of tail coverage or an ERP. Occurrence policies typically have higher premiums initially, but premiums remain stable over time. Renewal of occurrence policies is typically straightforward. | Choosing the wrong type of policy can result in unexpected premium increases or difficulty renewing coverage. |
| 6 | Understand the underwriting considerations and coverage exclusions for claims-made policies. | Claims-made policies may require proof of prior acts coverage or a clean claims history. Coverage exclusions may include intentional acts, criminal acts, or acts outside the scope of the insured’s profession. | Failure to disclose relevant information during underwriting can result in denial of coverage. Coverage exclusions can result in unexpected gaps in coverage. |
| 7 | Understand the importance of policy limits and deductibles. | Policy limits determine the maximum amount of coverage available for a claim. Deductibles are the amount the insured must pay before coverage kicks in. | Choosing inadequate policy limits or deductibles can result in unexpected out-of-pocket expenses. |
| 8 | Understand the differences in perspective between the insured and insurer. | The insured wants coverage for all potential claims, while the insurer wants to limit exposure to risk. | Balancing the needs of the insured and insurer can be challenging. |
| 9 | Understand the importance of professional liability insurance. | Professional liability insurance provides coverage for claims arising from professional services. | Without professional liability insurance, professionals are exposed to significant financial risk. |
Tail Coverage: What It Is and Why You Need It with a Claims-Made Policy
| Step | Action | Novel Insight | Risk Factors |
|---|---|---|---|
| 1 | Understand the difference between occurrence and claims-made policies. | Occurrence policies cover claims that arise from incidents that occurred during the policy period, regardless of when the claim is made. Claims-made policies cover claims that are made during the policy period, regardless of when the incident occurred. | If you have a claims-made policy, you need to be aware of the potential for coverage gaps. |
| 2 | Understand the importance of retroactive dates and prior acts coverage. | Retroactive dates determine the date from which coverage begins for claims-made policies. Prior acts coverage extends coverage to incidents that occurred before the retroactive date. | Without prior acts coverage, you may not be covered for incidents that occurred before the retroactive date. |
| 3 | Understand what tail coverage is. | Tail coverage, also known as extended reporting period coverage, provides coverage for claims that are made after a claims-made policy has expired. | Without tail coverage, you may not be covered for claims that are made after your policy expires. |
| 4 | Determine if you need tail coverage. | If you are switching from a claims-made policy to an occurrence policy, you do not need tail coverage. If you are retiring or leaving a job, you may need tail coverage to ensure that you are covered for any claims that arise after you leave. | If you do not purchase tail coverage, you may be personally liable for any claims that arise after your policy expires. |
| 5 | Understand the underwriting process for tail coverage. | Tail coverage is typically offered by your insurance carrier, and you will need to apply for it. The cost of tail coverage is typically a percentage of your insurance premium. | The cost of tail coverage can be expensive, and you may need to budget for it. |
| 6 | Understand the importance of policy limits. | Policy limits determine the maximum amount that your insurance carrier will pay for a claim. | If your policy limits are too low, you may be personally liable for any damages that exceed your policy limits. |
| 7 | Understand the importance of risk management. | Risk management involves identifying and mitigating potential risks to your business or personal assets. | Without proper risk management, you may be more likely to face claims that exceed your policy limits. |
| 8 | Understand the role of your insurance carrier. | Your insurance carrier is responsible for providing coverage for claims that are covered by your policy. | If your insurance carrier goes bankrupt or is unable to pay claims, you may not be covered for any claims that arise. |
| 9 | Understand the potential for lapses in coverage. | If you do not renew your policy or if you let your policy lapse, you may not be covered for any claims that arise after your policy expires. | Lapses in coverage can be costly and can leave you personally liable for any damages that occur. |
| 10 | Understand the importance of run-off coverage. | Run-off coverage provides coverage for claims that arise after you retire or leave a job. | Without run-off coverage, you may not be covered for any claims that arise after you retire or leave a job. |
Understanding the Coverage Trigger in Liability Insurance Policies
| Step | Action | Novel Insight | Risk Factors |
|---|---|---|---|
| 1 | Determine the coverage trigger | The coverage trigger determines when a policy will respond to a claim. | Failure to understand the coverage trigger can result in a claim being denied. |
| 2 | Understand the different types of triggers | There are four types of triggers: incident-based, injury-in-fact, continuous, and manifestation. | Choosing the wrong trigger can result in a claim being denied. |
| 3 | Know the known loss doctrine | The known loss doctrine states that a policy will not cover a loss that the insured knew about before purchasing the policy. | Failure to disclose known losses can result in a claim being denied. |
| 4 | Understand the notice of circumstances provision | The notice of circumstances provision requires the insured to report any circumstances that may lead to a claim. | Failure to report circumstances can result in a claim being denied. |
| 5 | Know the importance of the retroactive date | The retroactive date is the date from which the policy will cover claims. | Choosing the wrong retroactive date can result in a claim being denied. |
| 6 | Understand the reporting period | The reporting period is the time frame in which claims must be reported to the insurer. | Failure to report a claim within the reporting period can result in a claim being denied. |
| 7 | Know the extended reporting period (ERP) | The ERP is an optional period of time after the policy has expired during which claims can still be reported. | Failure to purchase an ERP can result in a claim being denied. |
| 8 | Understand tail coverage | Tail coverage is a type of ERP that provides coverage for claims that arise after the policy has expired. | Failure to purchase tail coverage can result in a claim being denied. |
| 9 | Know the importance of loss run and claims history reports | Loss run and claims history reports provide information about an insured’s claims history. | Failure to provide accurate information can result in a claim being denied. |
| 10 | Understand prior acts coverage | Prior acts coverage provides coverage for claims that arise from incidents that occurred before the policy’s retroactive date. | Failure to purchase prior acts coverage can result in a claim being denied. |
The Role of Aggregate Limits in Liability Insurance
| Step | Action | Novel Insight | Risk Factors |
|---|---|---|---|
| 1 | Understand what aggregate limits are | Aggregate limits refer to the maximum amount of coverage that an insurance policy will provide over a specific period of time. | Failure to understand aggregate limits can lead to underinsurance and financial loss in the event of a claim. |
| 2 | Determine the policy period | The policy period is the length of time that the insurance policy is in effect. | Failure to accurately determine the policy period can result in a lapse in coverage and potential financial loss. |
| 3 | Determine the type of liability policy | Liability policies can be either claims-made or occurrence policies. | Understanding the type of policy is important because it affects how aggregate limits are applied. |
| 4 | Understand how aggregate limits work in occurrence policies | In occurrence policies, the aggregate limit applies to each occurrence of a covered event. | This means that the policy will pay up to the aggregate limit for each separate occurrence, regardless of the number of claims made. |
| 5 | Understand how aggregate limits work in claims-made policies | In claims-made policies, the aggregate limit applies to all claims made during the policy period. | This means that once the aggregate limit is reached, the policy will no longer provide coverage for any additional claims. |
| 6 | Consider the retroactive date | The retroactive date is the date from which the policy will provide coverage for claims. | Failure to consider the retroactive date can result in claims being denied if they occurred before the retroactive date. |
| 7 | Consider the need for tail coverage | Tail coverage provides coverage for claims made after the policy period has ended. | Failure to obtain tail coverage can result in claims being denied if they are made after the policy period has ended. |
| 8 | Consider the need for prior acts coverage | Prior acts coverage provides coverage for claims that occurred before the policy period but were not discovered until after the policy period has ended. | Failure to obtain prior acts coverage can result in claims being denied if they occurred before the policy period but were not discovered until after the policy period has ended. |
| 9 | Consider excess liability insurance | Excess liability insurance provides additional coverage above and beyond the primary liability policy. | Failure to obtain excess liability insurance can result in underinsurance and financial loss in the event of a claim. |
| 10 | Consider umbrella liability insurance | Umbrella liability insurance provides additional coverage above and beyond both the primary liability policy and excess liability insurance. | Failure to obtain umbrella liability insurance can result in underinsurance and financial loss in the event of a claim. |
| 11 | Understand self-insured retention (SIR) | SIR is the amount that the insured must pay before the insurance policy will provide coverage. | Failure to understand SIR can result in unexpected out-of-pocket expenses in the event of a claim. |
| 12 | Understand deductibles | Deductibles are the amount that the insured must pay before the insurance policy will provide coverage. | Failure to understand deductibles can result in unexpected out-of-pocket expenses in the event of a claim. |
| 13 | Consider loss ratio | Loss ratio is the ratio of claims paid out by the insurance company to premiums collected. | Understanding loss ratio can help determine the financial stability of the insurance company and the likelihood of claims being paid out. |
| 14 | Understand premiums | Premiums are the amount paid by the insured for the insurance policy. | Understanding premiums is important because it affects the cost of coverage and the amount of coverage that can be obtained. |
| 15 | Understand the role of the insurance underwriter | The insurance underwriter is responsible for assessing risk and determining the terms and conditions of the insurance policy. | Understanding the role of the insurance underwriter can help in negotiating the terms and conditions of the insurance policy. |
Common Mistakes And Misconceptions
| Mistake/Misconception | Correct Viewpoint |
|---|---|
| Occurrence and Claims-Made policies are the same thing. | Occurrence and Claims-Made policies are two different types of liability insurance policies with distinct coverage triggers. An occurrence policy covers claims that arise from incidents that occurred during the policy period, regardless of when the claim is made. A claims-made policy covers only those claims that are reported to the insurer while the policy is in force or within a specified time frame after it expires, for incidents that occur on or after a retroactive date specified in the policy. |
| Claims-Made policies are cheaper than Occurrence policies. | The cost of an insurance policy depends on various factors such as industry risk, business size, location, etc., and not solely on whether it’s an occurrence or claims-made policy type. In some cases, a claims-made policy may be less expensive initially but can become more costly over time due to increasing premiums at renewal periods and additional costs associated with purchasing tail coverage if needed when switching insurers or retiring from practice. |
| Switching from one type of liability insurance to another is easy and straightforward. | Switching between occurrence-based and claims-made based liability insurance requires careful consideration because each has its own unique features which could impact your coverage needs differently depending on your situation (e.g., how long you’ve been practicing). It’s important to consult with an experienced broker who can help you navigate this process effectively by assessing your risks carefully before making any changes so that you don’t end up underinsured or paying too much for unnecessary coverage options. |
| Tail Coverage isn’t necessary when switching from a Claims-Made Policy. | Tail Coverage provides extended protection beyond the expiration date of a claims-made liability insurance contract for covered events occurring during its term but reported later; without it, there would be no protection against future lawsuits arising out of past events once your current policy expires. It’s essential to purchase tail coverage when switching from a claims-made policy to an occurrence-based one or retiring from practice, as it ensures that you’re protected against any future claims arising out of past incidents. |
| Occurrence policies provide unlimited protection for covered events. | While occurrence policies offer broader coverage than claims-made policies, they don’t necessarily provide unlimited protection. The amount of coverage provided by an occurrence policy is typically limited by the policy limits and exclusions specified in the contract. Therefore, it’s important to review your insurance contract carefully with your broker to ensure that you have adequate coverage for all potential risks associated with your business operations. |