Claims Made vs. Occurrence (CGL)

What follows is a description of the various issues relating to this topic.

Where a policy is written on a “claims-made” basis, this means that the policy in force at the time a claim against you is made will pay for losses, regardless of when they occurred in the past. (Assuming no retroactive inception date restriction).

With an “occurrence” based policy, even though the policy may have expired, provided the policy was in force at the time that the bodily injury or property damage occurred, a claim can still be made against it.

Both forms of coverage have advantages and drawbacks, depending on the circumstances. It is difficult to predict whether, in any particular instance, it will be advantageous to insure using one form or the other. Only in hindsight can a judgment be made.

Disadvantages of “occurrence” policies

For malpractice exposures written on an “occurrence” basis it is important to arrange limits which are somewhat more than is necessary in order to meet tomorrow’s exposures. On a “claims-made” basis, one does not need to project twenty years or more into the future when setting limits; 7 years is usually the longest time it takes for a case to go through the court system, so even though you still need to project into the future, the length of time is much less.

Advantages of “claims-made” policies

There are advantages to some “claims-made” policies in addition to normal “claims-made” advantages as follows:

Disadvantages of “claims-made” policies

While the claim has to be made during the policy period, the occurrence which gave rise to the claim has to fall after the retroactive date of the policy. A “claims-made” policy wording covers as follows:

This insurance does not apply to “bodily injury” or “property damage” which occurred before the retroactive date, if any, shown in the Declarations.

A “claims-made” policy can have:

Ideally, you want no retroactive date or one that includes the entire period that you have had “claims-made” coverage. Anything less makes you self-insured for any claims for injuries or damage that occurred during prior claims-made policy periods which you have not reported to your insurer at the time of the occurrence (unless such claims are covered by supplemental “tail” coverage).

Limits of Liability and need to project into the future

For “occurrence” based coverage, I suggest buying much higher limits than with claims made, bearing in mind that an incident today may not be ruled upon in court for, at the low end, a few years, and at the high end, for over twenty years. It is difficult to predict what the amount of the awards will be at some time in the future. It is therefore advisable to choose a limit that is somewhat in excess of the amounts being awarded for single injury cases today. For “claims-made” coverage a lower limit is more likely to be adequate.

Changing Policies

When arranging coverage, consider:

If you switch from “occurrence” to “claims-made” coverage. If you switch from “occurrence” coverage to a “claims-made” policy with a retroactive date being the same as the date of the change, and then 1 year later you buy another “claims-made” policy from another insurer, be sure that it picks up coverage dating back to the date when you first changed from “occurrence” to “claims-made.” Otherwise, you will need full “tail” coverage on the expiring “claims-made” policy to protect you from future claims that occurred during this period but were not reported as occurrences. Ideally, the retroactive date of any new “claims-made” policy should be the expiration date of the last “occurrence” policy.

Switching “claims-made” policies and carriers. When a “claims-made” policy expires, so does its coverage, even for injuries that occurred during the policy year(s), but were not reported. The Extended Reporting Period (“tail” coverage) provided by the policy, extends the reporting time for occurrences during the policy period.

Once an Insured is hooked on a “claims-made” policy it is difficult to get off. The Insured is given a 90 day “tail” coverage extension which can sometimes be extended to 1 / 5 years, and even this is at the option of the Insurer, and is not under the control of the Insured.

90 days, or even 1 year, is simply not enough on “long “tail” business, to catch all the claims, which may be made at a future date; particularly when claims may be forthcoming twenty years or more after the occurrence takes place.

The only effective answer to the problem is to either leave the cover with the “claims-made” carrier, who will likely maintain retroactive cover back to the date when the first change over from “occurrence” took place, or purchase prior acts coverage from the replacement “occurrence” basis insurance company.

To purchase “tail” coverage from the existing “claims-made” insurer, might only provide the insured with 5 years coverage which is not enough. 5 years may not even be available, and if it is, it may be expensive.

Notifying the insurer of an occurrence does not trigger coverage; an actual claim for damages must be made. The question whether you have coverage for a claim will depend on many and often complex factors, such as:

1. the retroactive date of your present policy;

2. the “other insurance” clause of your present policy – if the incident was reported under a previous policy, your present policy may not cover at all or only on an excess basis,

3. “tail” coverage,

4. the status of the aggregate limit of the policy that applies.

“Tail” coverage

Claims made policies usually only provide a 90-day extended reporting period beyond the expiration of the policy during which claims that occurred during the policy period can be reported.

“Claims-made” policies can sometimes be broadened to provide the following extensions to the standard 90 days “tail” coverage

Basic “tail”

(Extended Reporting Period) extends for five years after the policy expiration date. It does not restore the policy limit and is quite limited in scope; it only covers claims due to occurrences (1) that the insured reported during the policy period or 60/90 days thereafter, (2) that occurred after the retroactive date in the policy to which the “tail” coverage is attached, (3) that are not covered by any other policy when the claim is made, and (4) if the aggregate limit of the policy is not yet exhausted.

The purpose of the basic “tail” (also called Extended Reporting Period) is to fill gaps in coverage when, for example:

1. the insurer cancels a claims-made policy and the insured cannot find a replacement;

2. the insured retires from business or from a certain operation;

3. the insured changes carriers or switches from a claims-made policy to an “occurrence” policy — and vice versa;

4. the claims-made policy is renewed subject to a later retroactive date;

5. a renewal claims-made policy is modified with a “laser” endorsement. (“laser” endorsements added to claims-made policies that exclude specific accidents, products, or locations. Because the exclusions are very narrow, they were thought to resemble a laser.)

Full (Supplemental) “tail”

A policy with full “tail” coverage comes close to an “occurrence” policy. It excludes incidents that occur after the policy to which the “tail” is attached has expired or that occurred prior to the retroactive date of that policy. For claims arising from reported occurrences, coverage begins five years after the policy period when the basic “tail” ends; for all other claims, sixty/ninety days after the policy period (to prevent overlapping with the Basic “tail”).

The cost for full “tail” coverage is usually 200% of annual premium. The “tail” premium will restore the original general and the products-completed operations aggregate limits of the policy. The option to purchase full “tail” coverage is guaranteed, even if the policy is canceled.

Full “tail” coverage is essential (1) when an insured retires from business, or (2) when the insured changes insurers or policies and the new policy has a later retroactive date. When changing insurers, the insured must carefully weigh the new insurer’s promise of cheaper coverage (due to its limited exposure) against the cost of purchasing “tail” coverage from the old carrier.

The policy provision for “tail” coverage usually reads:

We will provide one or more Extended Reporting Periods … if:

1. This Coverage Part is cancelled or not renewed; or

2. We renew or replace this Coverage Part with other insurance that:

Limitations of “tail” Coverage

The five-year or basic “tail” is sometimes free of charge but covers only those claims that have been reported during the policy period or 60/90 days thereafter and while the original limit is not yet exhausted. Supplemental “tail” coverage must be purchased to cover claims that were not reported during this period.

Both “tail” coverages apply only to claims stemming from injuries or damage that occurred during the policy period back to the retroactive date. It does not cover claims that occurred prior to such date, nor after the policy expires.

“Tail” coverage is considered excess if any other policy (whether primary, excess or contingent) applies.

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