Occurrence vs. claims-made policies

The difference is what sets the coverage off. An occurrence policyOccurrence policyAn occurrence policy covers injury or damage that happens during the policy period, even if the claim is filed after the policy has ended.Read the definition covers injury or damage that happens while the policy is in force, even if the claim arrives years later, while a claims-made policyClaims-made policyA claims-made policy covers claims first made against you during the policy period, for work or incidents that happened on or after the policy’s retroactive date.Read the definition covers claims first made while the policy is in force, as long as the incident behind them happened after the policy’s retroactive dateRetroactive dateA retroactive date is the earliest date of work or events a claims-made policy covers, so anything that happened before it isn’t covered, even if the claim is new.Read the definition. General liability is commonly written on an occurrence basis, and professional liability is often claims-made.

Day to day, the difference stays invisible. Where it matters is the edges, when you change insurers, let a policy lapse, switch from one form to the other or close the business, because an old occurrence policy keeps protecting the year it covered, while protection for past work under a claims-made policy depends on keeping coverage continuous or buying an extended reporting periodExtended reporting periodAn extended reporting period (ERP) gives you extra time after a claims-made policy ends to report claims about work done while the policy was in force.Read the definition, usually called tail coverage.

Two different calendars

Virginia’s insurance rules define claims-made coverage about as precisely as anyone does: it covers your liability for injury, damage or a wrongful act that happened before the coverage ended but after any retroactive date, provided the claim is first made during the policy period or an extended reporting period. Every phrase in that definition is a condition, and every one has to be true at once.

Occurrence coverage needs only one thing to be true. The injury or damage has to happen while the policy is in force, and it doesn’t matter whether the claim arrives next week or in five years.

One way to picture it: an occurrence policy is tied to the calendar of events, and a claims-made policy is tied to the calendar of claims.

How the retroactive date works

Here’s the mechanism, step by step, because this is the date that decides whether years of past work are covered.

1. The retroactive date is set when you first buy. Virginia’s rules define it as the date on or after which an injury, damage or wrongful act may happen and still be covered under a claims-made policy.
2. Each renewal keeps the same date. If you renew with the same insurer and the same retroactive date, your coverage reaches back to that first day, and the window of protected past work gets longer every year.
3. A new date wipes out the past. If a renewal or a new policy moves the retroactive date forward, anything you did before the new date falls outside the policy, even if the claim is reported while you’re insured.

That third step is why the date is worth protecting. North Carolina’s guidelines say a claims-made insurer can’t advance an existing retroactive date without the insured’s written consent, and other states set their own rules, so read anything you’re asked to sign at renewal with the date in mind.

Why professional liability is usually claims-made

Think about how each kind of mistake comes to light. When a shopper slips in a store or a contractor’s ladder falls on a car, everyone knows it happened that day, so the claim and the incident sit close together and an occurrence policy fits the risk well.

Professional mistakes surface late. A bookkeeping error may not come out until a tax notice arrives a year later, and a flaw in a set of drawings may show up only when the building is finished, so an insurer writing occurrence coverage for that kind of work would be pricing claims that might not arrive for many years, against a policy period long since closed. Claims-made coverage lets the insurer price the claims it expects to receive in the year instead, which is why professional liability is so often written that way while general liability usually isn’t.

Occurrence coverage has its own long tail, though. A contractor’s work can cause damage long after the job, like a deck that gives way two years later, and under an occurrence policy it’s typically the policy in force when the injury or damage happens that responds, which is why contractors pay attention to products-completed operationsProducts-completed operationsProducts-completed operations is the part of general liability that covers injuries or damage caused by your finished work, or products you sold, after the job is done.Read the definition coverage. General liability vs. professional liability explains how the two policies divide the work.

What tail coverage is, and when you need it

Picture the last day of a claims-made policy. Everything you did while it was in force is still out there, and any claim about that work that arrives tomorrow has no policy to land on. An extended reporting period, the tail, fixes that by giving you more time to report claims after the policy ends, for work done before it ended, as Virginia’s rules put it.

States split the tail into pieces in different ways. Virginia’s rules distinguish a basic extended reporting period, which comes automatically at no additional premium, from a supplemental one that you can buy, and the automatic one is usually short, so don’t mistake it for real run-off protection.

North Carolina’s guidelines require claims-made policies to offer the option to buy an extended reporting period on cancellation or nonrenewal, lasting at least one year for non-medical claims. They also set the aggregate limit for that period at 100% of the expiring policy’s aggregate, which means the tail doesn’t come with a smaller limit there. Your own state’s rules may differ, so check the extended reporting provisions in your policy.

What happens when you switch, lapse or close?

Claims-made trouble tends to start at a transition, since that’s when the retroactive date or the reporting window can break. Four transitions matter, and here’s how each one plays out.

Switching insurers is the case people handle best, because a new insurer will often ask about your current retroactive date. When it can be carried over, often called prior acts coverage, you’re continuous and no tail is needed, and when it can’t, the tail from the old insurer is what covers the years before the new date. Either way, get the answer in writing before the old policy ends. While the old policy is still in force, also tell that insurer about any incident that might turn into a claim, since many claims-made forms accept this kind of notice of circumstances and can then treat a later claim as reported during their period. And know that prior acts coverage generally won’t cover something you already knew about when the new policy began. The timing details are in our guide to switching business insurance without a gap.

Moving from claims-made to occurrence catches more people out. The new occurrence policy looks like better coverage, and for future work it may be, but it covers nothing that happened before it started, and the old claims-made policy generally stops answering new claims once it ends, apart from any automatic reporting period it includes. Without a tail, every project you finished under the claims-made form is unprotected, and it’ll stay that way for as long as claims about that work can still be made.

A lapse is the easiest of the four to drift into. Let a claims-made policy run out for even a few weeks, and the next policy you buy may come with a fresh retroactive date, the day it starts, so every year of work before the gap is left outside it, and claims made during the gap itself may have nowhere to go. If cash is tight at renewal, call the insurer before the policy ends, because keeping the date continuous is usually worth more than whatever the gap saves.

Closing is the one we’d flag hardest, because in our view it’s the one owners miss most. A consultant who retires, a designer who takes a full-time job or a two-person agency that winds down tends to cancel everything at once, reasonably enough, since there’s no more work to insure. But clients can still bring claims about the work you already did, sometimes long after the last invoice, and a claims-made policy that has ended generally won’t respond to them. Tail coverage exists for this, and the window to buy it is short, so put it on the closing checklist next to the final tax return. The same problem, seen from the consultant’s side, is why consultants need professional liability planned around their exit as well as their start.

How to tell which one you have

Look at the declarations page first. Some states require claims-made coverage to say so prominently, and North Carolina, for instance, requires the application and declarations page to carry a bold notice identifying any part of the policy written on a claims-made basis, plus a declarations page that shows which coverages are claims-made and which are occurrence when a policy has both.

If the policy is claims-made, find three things: the retroactive date, the reporting requirements in the conditions, and the extended reporting provisions. How to read a business insurance policy shows where each one usually sits, and with Corgi, underwriters, not a broker, answer your questions about how your policy is written.