Claims Made vs Occurrence Liability Insurance Policies

Most casualty insurance policies (general liability, automobile, workers’ compensation) pay for events that occur during the policy period. For example, an auto insurance policy will pay for an accident that occurs while the policy is in force.

Directors and officers liability insurance policies, professional liability and employment practices liability policies, however, pay for lawsuits filed during the policy period; the wrongful act could have occurred years before. Claims-made policies respond only when a suit is filed, or when a strong threat of a suit exist.

Occurrence policy: pays based on the date of the accident or occurrence.
Claims-made policy: pays based on the date of the lawsuit.

The downside of a claims-made policy comes if the policy is cancelled.

Example: A directors and officers liability insurance policy is put in force January 1, 2004, and is renewed in 2005 and 2006. In 2007, however, the insured decides to end the coverage, as the premium has increased. Six months later, a letter from an attorney arrives announcing a lawsuit for discrimination in hiring that occurred in 2006. No coverage. Although the policy was in force at the time of the alleged discrimination, the policy was not in force when the suit was filed.

The solution to the above problem is the extended reporting period feature found in claims-made policies. For an additional premium (paid at the time the policy is cancelled) coverage is extended for incidents that occurred during the policy period but for which no claim was filed until after cancellation.