There are two basic types of insurance policies: occurrence and claims made. Instance policies cover incidents that occur during the policy period; claims made policies cover incidents that occur after the retroactive start date. This retroactive start date is usually the effective date of the policy or a date in the past that has been agreed upon between the insured and the insurer.
Generally speaking, occurrence policies are more expensive than claims-made policies. The former start out low and increase in cost yearly, while claims-made premiums stay relatively flat for the entire policy period. However, since occurrence policies include prior acts coverage, their premiums can rise significantly over five years.
While both types of insurance policies offer similar coverage, occurrence policies provide peace of mind for those who want to pay for their insurance upfront. An occurrence policy is also easier to switch between insurers. However, some carriers may not offer occurrence policies for certain types of insurance, such as professional liability or employment practices liability insurance.
One major disadvantage of claims-made policies is that they must last the life of the policy. This means that a $1 million policy would provide little or no protection if a large claim triggered the policy’s limit. On the other hand, a claims-made policy can be more flexible and affordable to buy, but this disadvantage can make switching policies a challenge.
An occurrence policy covers incidents that occurred while the policy was in force. However, it does not matter whether or not the incident is reported or the lawsuit is filed. In addition, it may not be discovered until many years later. Nonetheless, this occurrence policy is the best option for most companies.
When switching from occurrence to claims-made policies, it is important to make sure you have a policy with a retroactive date that matches the date of the change. In addition, you need to consider whether tail coverage makes sense for your business. A claims-made policy can be expensive, especially for businesses with multiple locations.
However, the primary difference between occurrence and claims-made policies is the coverage limits. Occurrence policies cover incidents that occur throughout a policy year, while claims-made policies cover incidents that occurred six or more years ago. Because of these differences, occurrence policies are typically more expensive. In some cases, occurrence policies may not even cover claims that occurred more than six years ago.
Occurrence policies provide greater peace of mind, but they cost more. The policy limits are reset every year. For example, a $1 million policy with an occurrence limit would provide coverage for a $1 million lawsuit in year one and a $3 million policy would cover a similar amount in year two. Occurrence premiums are between five and ten percent higher than fully mature Claims-Made premiums. Nevertheless, the rates of both types are generally flat year-over-year.
Assuming that you choose an occurrence policy, it is important to determine an aggregate limit. The aggregate limit is the total amount that will be paid for a covered loss. If you have a low limit, you might not want to buy claims made coverage.