In this article, we will look at the differences between claims-made and occurrence policies. We will also cover the cost differences and any restrictions of each type of policy. Ultimately, this will help you choose the right policy for your needs. Whether to choose a claims-made policy or an occurrence policy depends on your particular needs and situation.
Differences between claims-made and occurrence policies
A claims-made policy covers all injuries or incidents reported during the policy year. There are no retroactive dates with an occurrence policy. This type of policy lets you purchase the appropriate policy limits based on the current market conditions. However, claims-made policies tend to be more complex.
With a claims-made policy, the risk of loss will increase incrementally for the first five years and decrease incrementally for the sixth. By that time, the premiums will level off, and mature claims-made policies typically have rates comparable to those of occurrence policies. Both types of policies have advantages and disadvantages.
Cost of each type of policy
Generally, claims made policies have lower premiums than occurrence-based policies, but the price can increase over time, particularly if you have large claims. An occurrence-based policy also offers more flexibility, but may be more expensive in the beginning. However, it can provide better peace-of-mind and coverage over many years, and you can switch insurers without losing coverage.
Although claims-made policies initially cost less, they gradually become more expensive, especially after five years. The price will rise gradually until it matches the price of occurrence-based policies. A claim-made policy may require tail coverage if it has expired, though some policies provide free tail coverage after five years.
Restrictions of claims-made policies
A claims-made insurance policy has certain restrictions. For example, a claims-made policy may not respond to a claim that occurs before its retroactive date. In contrast, a policy that covers only injuries that occur after the policy’s retroactive date may be acceptable. However, this option may be costly, and it’s better to know what limitations may apply before making a decision.
Another restriction associated with claims-made policies is the existence of continuity of insurance. In order to receive the full benefits of an insurance policy, a claim must be made during the policy’s active period. This coverage can be retroactive or current.
Cost of occurrence policies
When deciding between occurrence and claims-made policies, it is important to keep in mind the tail coverage costs. This coverage is necessary if your rates start to increase after your policy expires. However, it can be expensive, requiring you to pay more than 200% of your last annual premium. Fortunately, tail coverage is generally less expensive during the first five years, and the price tends to even out as your exposures increase over time.
In general, claims-made insurance premiums are much lower than those for occurrence policies, as the premium is calculated on the likelihood that you will file a claim during the year of premium payment. This is because claims made for professional services are not typically reported during the first year of coverage, so the premiums for claims-made coverage will be lower for the first year. In addition, claims-made policies require no extended reporting endorsements, which means that they will continue to apply coverage regardless of when you make a claim.
Reporting requirements of claims-made policies
If you have a claims-made policy, you will need to be aware of the reporting requirements that apply to this type of policy. Claims-made policies are subject to much stricter reporting requirements than occurrence policies. If you do not follow these requirements, you could end up losing coverage.
You should understand these requirements, as they can vary widely. Most claims-made policies will require you to report claims during the policy period, and many may also have a retro-date clause, which effectively eliminates coverage for events that occurred before the policy was issued.