Claims-made insurance policy

You must have a policy in action when you file a claim with claims-made insurance. If you don’t, your insurer won’t pay for your previously covered loss.

Insurers typically use claims-made policy forms for professional liability insurance (also called errors and omission insurance or E&O) and directors and officers insurance (D&O).

Claims-made and occurrence-based policies are different in two key respects:

• Coverage triggers
• Policy limits

With an occurrence-based policy, insurers pay for losses that occur during the policy period, even if you no longer have the policy when you file the claim.

As long as coverage is continuous, claims-made insurance can also cover claims related to insurable incidents that happened under previous claims-made policies with different carriers.

Many forms of insurance have per-incident limits (funds available for each loss) and aggregate limits (amount available for all claims during the active policy). These define how much carriers will pay for a covered loss.

If you bought a claims-made policy with a per-incident limit of $1 million and an aggregate limit of $3 million, the aggregate limit would remain fixed for the lifetime of the policy. With occurrence policies, your limits will reset each year, giving you more protection against future lawsuits.

Since claims-made policies have less coverage because their limits don’t reset, they are typically less expensive initially than occurrence policies. However, premiums typically increase with renewals to reflect a higher likelihood of claims.

Both types of insurance provide continuous coverage, but differently:

Claims-made insurance provides continuous coverage for your prior acts as long as you have insurance today and maintained it continuously in the past. Your current policy pays for claims arising from incidents that happened long ago even if you had insurance with another company. If you dropped your coverage at some point, creating a coverage gap, speak with your current insurer about resetting your claims-made policy retroactive date. This will involve purchasing prior acts or nose coverage.

An occurrence-based policy provides lifetime coverage for incidents that happened during a policy period, even if you cancel your insurance later and regardless of when you file a claim.

Claims-made policies reflect current claims costs. This enhances your insurer’s financial resources and ability to pay your future claims.

Lower initial premiums free up cash flow for your business.

Claims-made policies are more complicated than occurrence policies. Special steps must be taken when switching to a new insurer.

Claims-made policies only provide fixed coverage limits. If you end up using your policy, you might not have enough protection left for future claims.

If you cancel your claims-made policy because you’re changing careers or retiring, beware the coverage gap. Under a claims-made policy, the coverage must be in force for the company to pay claims.

Canceling your policy means you’ll be uninsured for new claims. To protect yourself, you’ll need to buy an extended reporting period or tail coverage.

Insureon helps small business owners compare business insurance quotes with one easy online application. Start an application today and consult with a licensed agent from your state to learn more about claims-made policies and other options.