Claims Occurring and Claims Made are the two bases of cover for liability insurance.
From a non-insurance person, the obvious question is ‘Does it matter?’ The answer is it very much does matter and in certain circumstances the selection of the wrong policy can be a very significant disadvantage.
What is a claims occurring basis?
An insurance policy on a ‘Claims Occurring’ basis meets claims that occur during the policy period irrespective of when the claim is made. The usual general liability insurances such as employers liability, public liability and product liability are normally on a ‘Claims Occurring’ basis.
What is a claims made basis?
An insurance policy on ‘Claims Made’ basis meets claims that are made and reported during the policy period for work undertaken after the Retroactive Date shown in the policy. ‘Claims Made’ basis is the market norm for Professional Indemnity and its derivatives, such a Medical Malpractice, Directors & Officers Liability, Trustees Indemnity and the like. It is also used as a cover restriction by insurers in respect of liability arising from high risk products in order to limit the their exposure and for some Public and Product Liability extensions, e.g. Financial Loss.
The requirement of a ‘Claims Made’ policy to have a claims reported during the policy period is very onerous upon the Insured, and the insurer will usually ask for a No Claims Declaration at each renewal stating that after investigation there are no known claims or circumstances that could give to a claim that have not been reported, signed by a person authorised to make the statement. Failure to report a claim in the correct policy may lead to the claim being declined. There is no similar requirement for a No Claims Declaration for a ‘Claims Occurring’ policy, but the policy will contain claims conditions that need to be complied with in order for a claim to be met.
What is the retroactive date?
The Retroactive Date in a policy is extremely important in a ‘Claims Made’ policy, and this is usually the date at which cover was first incepted. At each renewal the same Retroactive Date is carried forward. A new insurer needs to be made aware of the Retroactive Date in any previous policy as it is market practice for a new insurer to carry forward the Retroactive from the previous policy and not use the first the day of cover with the new insurer as the Retroactive Date, otherwise liability arising work prior to inception of the new policy would not be covered.
What are the main differences between a claims made and occurring basis on a liability insurance policy?
The key differentiator between a ‘Claims Occurring’ basis and a ‘Claims Made’ basis is the extent of residual cover when a policy is lapsed or cancelled. Neither basis will provide cover for claims that occur after the policy has been lapsed or cancelled, even if arising from work undertaken when insurance was in force. A ‘Claims Occurring’ basis will cover claims that have occurred during a period of cover even if the claim is made after the cover has been lapsed or cancelled. However, a ‘Claims Made’ basis will not provide cover for any claims after a policy has been lapsed or cancelled as there is no policy in force when the claim is made. This means that on lapsing or cancelling a ‘Claims Made’ policy, the historic cover paid for has expired and is worthless. This may seem unfair, but it is the only basis upon which insurance is available for some classes of cover.
Therefore, when deciding to lapse or cancel cover, on either basis but especially ‘Claims Made’, consideration should be given to the purchase of ‘run off’ cover. This will cover claims after the lapsing or cancelling arising from work occurring prior to lapsing or cancelling. The cost of ‘run off’ in the first year may be no different to the annual premium for full cover, but should reduce over a time as the likelihood of a claim diminishes. See more on cancelling a claims made insurance policy.
The conclusion is that a ‘Claims Occurring’ wording is preferable to a ‘Claims Made’ wording and should be chosen in preference if there is a choice and all other things are equal.