To make sure your liability insurance provides you with the level of protection you need, it’s worth checking into which type of coverage you have. There are subtle but important differences between a claims made policy and an occurrence policy. You don’t want to discover the differences of these two commercial liability policies on the day when you suddenly need to make a claim.
How Occurrence Policies Work
With an occurrence policy, the property damage or bodily injury must occur during the time your policy is in effect in order to be covered. Even if the affected party waits for years to file a claim, and you no longer carry the insurance at that future time, your insurer must still cover the damage because your policy was in effect at the time of the actual occurrence.
How Does a Claims Made Policy Work?
The claims made policy must be in effect at the time that a claim is made. In the above scenario, if an accident occurred and the claim was not made until years later, your insurer would not pay that claim unless you still maintain active coverage.
What to Watch for in Buying a New Policy
The key item you need to look for in a new claims made policy is the “retroactive date.” This date sets a time in the past before which no occurrences will be covered. In most cases, that retroactive date will be set as the date on which you bought the policy. This protects the insurer against a contractor buying a claims made policy AFTER the harm is suffered, but BEFORE any claim of damage is made.
This can make it difficult to switch between the two types of policies, because you may experience a retroactive gap in coverage. If you are switching from a claims made policy to an occurrence policy, however, you may be able to cover that gap with a “tail,” or extended reporting period.
Misconceptions about Coverage
Claims made policies are typically much more affordable during the first few years, and there is a misconception that they provide inferior coverage. For this reason, the majority of general liability policies are written as occurrence policies. In fact, if the claims made policy is instituted at the beginning of a construction project, it will provide coverage equivalent to that of an occurrence policy. With occurrence policies, it’s important to understand that the relevant date refers to when the property damage or personal injury occurred, rather than the date that the work was done.
Be sure that you speak with your insurer to clarify exactly when your coverage began and how long into the future it will continue.