Understanding Insurance — Occurrence vs. Claims-Made Coverage

Keith B. DunnaganInsurance is such an important component of today’s society. Today we take a look at the difference between a “claims made” policy and an “occurrence” policy. The type of policy is critical to whether or not coverage will be extended.

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Understanding Insurance
Occurrence vs. Claims-Made Coverage

By: Robert J. Enos, Esq.

When served with a lawsuit it is common practice to tender that lawsuit to your insurance carrier for the defense and indemnity of the case. Unfortunately, insurance carriers will deny coverage on the basis that the client purchased the wrong type of insurance coverage either: “Claims-made” or “occurrence” coverage. An understanding of these two types of coverages is important to making a fully informed decision on which type of coverage to buy. Some carriers offer only Claims-made.

There are several important differences between claims-made and occurrence coverage. Key among them are: Timing of claim filings required to trigger coverage, and how the limits work.

An occurrence coverage policy protects you from any covered incident that “occurs” during the policy period, regardless of when a claim is filed. Even though they may no longer have a policy with that previous insurance carrier, because it is an “occurrence” policy they still provide insurance protection. As a result, the occurrence policy will respond to claims that come in – even after the policy has been canceled provided the incident occurred during the period in which coverage was in force. Bottom line is an Occurrence policy offers permanent coverage for incidents that occur during the policy period. In addition, occurrence policy limits “restore” each year so that claims paid for incidents arising from one policy year do not deplete limits available to cover claims from other years. Occurrence coverage is the ideal coverage for contractors who build a project then years later get sued for a construction defect. It is also good for real estate professionals who might get brought into a lawsuit years after an escrow has closed.

The other type of insurance policy is the claims-made policy. Claims-made policies provide coverage for claims only when the alleged incident and the resulting claim happened during the period the policy is in force. Claims made policies provide coverage so long as the insured continues to pay premiums for the initial policy and any subsequent renewals. Each succeeding year the policy is continuously renewed, the “coverage period” is extended. Once premiums stop the coverage stops. Claims made to the insurance company after the coverage period ends will not be covered, even if the alleged incident occurred while the policy was in force.

A Claims-made policy will cover claims after the coverage period only if the insured purchases extended reporting period or “tail” coverage.

Claims-made limits do not restore each year the way occurrence coverage limits do. The policy limits in place when the policy is purchased remain the single set of limits available to protect the insured from all claims that could arise from care provided during the years the policy is continuously in force. The insured does not have a separate set of limits for each year the policy is in force. Claims-made coverage has replaced occurrence as the most common type of policy offered by many liability insurance companies. A number of factors are behind this including the fact that reduced carrier liability under claims-made can mean slightly lower premiums for insureds.

If you are considering a move from occurrence to claims-made coverage, be sure to seek professional legal advice to revise your partnership agreements, employment agreements, buy/sell agreements and other corporate contracts to specify who will be responsible for buying tail coverage.

The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at kbdunnagan@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal or tax advice. Every person’s situation is different. If you are facing a legal or tax issue of any kind, get competent legal and accounting advice in your State immediately so that you can determine your best options.