Occurrence-Based Insurance Policy
Definition

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What is an occurrence-based insurance policy?

An occurrence-based policy covers losses that happen during the time you have the policy, regardless of when you file a claim. It is designed to protect you against long-tail events – incidents that could cause injury or damage years after they occur. For example, a chemical spill is a long-tail event because it often takes decades to produce visible injuries or disease.

Occurrence-based policies will protect you against such events even if:

  • Many years pass before injuries or damages become known.
  • You have switched to another insurance policy or insurer.
  • You have canceled your insurance and not replaced it with another one.

Common occurrence-based insurance policies

Insurers typically use occurrence-based policy forms for general liability, umbrella liability, and commercial auto insurance.

How do occurrence-based policies compare with claims-made policies?

There are two important differences between occurrence-based policies and claims-made policies:

  • How insurance benefits are triggered
  • How maximum policy payouts are determined

With an occurrence-based policy, insurers will compensate you for losses that happen during the policy period, even if it is no longer active when you submit a claim.

As long as you maintained your coverage with no breaks, your current claims-made insurance policy can typically pay for losses from insurable incidents that occurred under previous claims-made policies with different insurers.

Policy limit differences with occurrence-based and claims-made policies

Many forms of insurance have per-occurrence caps (funds available to pay for your covered losses) and aggregate caps (amount used for all claims during the policy period). Together, these limits establish the maximum an insurer will pay if you suffer a loss under your policy.

With occurrence insurance policies, your limits will reset annually, giving you a new block of coverage to pay for claims that arise later. Over many years,  an occurrence policy will provide much more protection than a claims-made will. This is why they often cost more.

For example, if you bought an occurrence-based policy with a per-incident cap of $1 million and an aggregate cap of $3 million and your policy paid a $2 million claim in year 1, your aggregate limit would reset to $3 million in year 2. If you bought a claims-made policy, the aggregate cap would not reset.

Since claims-made policies have less coverage at risk because their limits never reset, they cost less initially than occurrence policies. However, premiums typically increase to reflect a higher risk probability.  Occurrence-based policies have higher premiums, but their cost remains stable over time.

Coverage continuity with occurrence-based and claims-made policies

Occurrence-based and claims-made policies provide for continuous protection, but in different ways:

An occurrence insurance policy usually provides lifetime protection against incidents that occurred while your policy was active, even if you dropped your policy later, and regardless of when you actually submit a claim.

Claims-made insurance provides continuous protection for your prior activities as long as you have coverage and kept it active with no gaps.

Your current policy will cover claims resulting from events that occurred long ago even if your policy was issued by another insurer.

If you canceled your policy at some point, resulting in a coverage “hole,” speak with your current insurer about adjusting your claims-made policy’s retroactive date. This will entail buying prior acts or “nose” protection.

What are the advantages of an occurrence insurance policy?

Occurrence-based policies have fixed costs. There will be no premium increase unless you switch jobs or the risk profile of your business changes.

They offer longer protection. As long as you had insurance when an incident occurred, you can file a claim against your insurance many years into the future, even if you no longer have the policy.

They’re simpler to manage. If you switch insurers or jobs, you don’t have to worry about purchasing an extended reporting period (also known as tail coverage).

What are the disadvantages of occurrence-based policies?

Occurrence-based policies cost more. During the first few policy years, they can be substantially more expensive than claims-made insurance.

They can be riskier to buy. Insurers must project the potential claim costs for their policyholders many years into the future. If it understates those costs, then it won’t charge its customers enough to pay for their future claims. This can strain the company’s financial reserves and solvency.

They can complicate your purchase decision. You have to consider what your risks and claim costs might be in the future when buying your policy today. If you set your limit too low, you may have to pay for a claim out of pocket later. Consult with a licensed Insureon agent to get a better understanding of how much coverage you should have.

How do occurrence-based vs. claims-made policies handle coverage continuity?

Both types of policies provide for continuous protection, but in different ways:

An occurrence insurance policy usually provides lifetime protection against incidents that occurred while your policy was active, even if you dropped your policy later, and regardless of when you actually submit a claim.

Claims-made insurance provides continuous protection for your prior activities as long as you have coverage and kept it active with no gaps.

Your current policy will cover claims resulting from events that occurred long ago even if your policy was issued by another insurer.

If you canceled your policy at some point, resulting in a coverage “hole,” speak with your current insurer about adjusting your claims-made policy’s retroactive date. This will entail buying prior acts or “nose” protection.

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