Many business owners see insurance as a necessary evil, but the truth is that it can have a major impact on your business. Employee benefits help recruit and retain employees. Risk management helps keep your business - and the people who work for it - safe and healthy. Commercial insurance keeps the litigation wolves from the door and can keep your business from going under. Getting your insurance coverage right is the key to reaping these benefits.
Not all insurance policies - like claims-made v. occurrence forms - are created equal or serve the same purpose. Smart business owners know that when they understand how their insurance policy is structured, they can get the best deal and keep their costs down while knowing they have the coverage they need. The cost of insurance is partly a function of when claims happen and how they are entered.
A Claims-Made insurance policy provides for losses on claims that occur during the policy term (or prior to the policy term if an earlier retroactive date applies) and are reported during the policy term. For instance, you may have switched one policy for another at renewal or one insurance company for another. With a claims-made policy, the coverage is triggered by the day on which a claim is made, or the date you first learned of a claim or possibility of a claim, and when you notify the insurance company. The insurance policy in force on that day is the one that will pay or defend against the loss - regardless of the term of the policy.
Occurrence Form policy
An Occurrence Form policy covers losses and claims that occur during the policy period, regardless of when they are reported. So, suppose you had an Occurrence policy with a term of 01/01/12 - 01/01/13, and you did not renew the policy. Now, if someone sued your company on 05/01/13 (months after the policy period expired) for something that occurred on 08/01/12 (during the policy period), the policy would provide coverage.
Extended reporting period
From the insurance industry's viewpoint, this is not as complicated as it may sound to you. It is a way of sorting out complications that could arise when arguing over what company is on the hook for payment of the claim. One solution to any customer confusion is the availability of a tail. A tail is an Extended Reporting Period (ERP) purchased to extend the claims reporting period of a Claims-Made policy.
The ERP serves as an endorsement to a Claims-Made policy that allows for claims to continue to be reported for a specified amount of time (such as 1, 2 or 3 years after policy expiration), but the loss still would have had to have occurred between the retroactive date and the policy’s expiration date. A retroactive date is the date on a Claims-Made policy that determines the earliest date of which a claim can occur for the policy to respond. The first time you purchase a Claims-Made policy, the retroactive date is typically the same date as the policy’s effective date. When you renew that policy, the retroactive date can stay the same, providing an earlier date than the policy effective date from which claims can have occurred and still be covered.
When comparing Claims-Made and Occurrence Forms, the Claims-Made premium may appear up to 80% lower than the Occurrence Form. It will increase in time, so it may be smart in given cases to add that tail in anticipation of that increase. Have your insurance counselor draw a detailed comparison for you to be sure the cost and experience benefit are the right ones for your business.
Which do you have?
Not sure whether you have a claims-made or occurrence policy? Click here for a complimentary policy review. We'll review your existing policy, let you know exactly what it does and does not cover, and, if appropriate, make recommendations for improvement.