What it means
Insurance contracts are written either on an occurrence basis or on a claims-made basis. Under an occurrence policy, if a customer is injured in your shop in Year 1 while your policy is active, the insurer is responsible for the claim even if the customer sues in Year 4 and your policy has ended.
The trigger is the date of the injury or damage. This gives businesses long-lasting certainty.
A company does not need to keep buying the same cover, or buy a special extension, to be protected for past events. That is particularly valuable for risks where harm may take years to appear, such as construction defects or exposure to harmful substances.
Occurrence cover is common in general liability insurance, which protects businesses from claims for bodily injury and property damage caused to others. Professional liability and directors and officers insurance more often use the claims-made basis.
The choice affects the price, with occurrence policies generally costing more because the insurer carries the risk for longer. Occurrence policies still have limits and exclusions.
The limit that applies is the one in force at the time of the event, so an old policy with low limits may now be inadequate for a claim that arrives late. Insurers also sometimes dispute which policy year was triggered when damage builds up slowly.
Good record keeping is essential. Companies should keep copies of every policy they have ever held, including those from insurers that have since closed or merged.
When a late claim appears, those documents may be the only proof that cover existed. When buying cover, finance teams should also ask how the policy deals with long-tail claims, where the harm happens gradually.
Some contracts say that the policy in force when the damage first began is the one that responds, while others spread the loss across several years. The wording can change who pays and how much, so it is worth reading before a claim arises.
In practice
Real-world examples
Example 1
A restaurant holds an occurrence-based general liability policy in Year 1. A customer slips on a wet floor that year but only brings a claim three years later, after the restaurant has changed insurer. The Year 1 insurer handles the claim because the incident happened during its policy period.
Example 2
A building contractor completes a project in Year 2 and later faces a claim for water damage caused by faulty work. The finance team finds the old occurrence policy and notifies the insurer straight away. The cover responds to the loss even though the contractor no longer buys insurance from that company.
Example 3
A software consultant buys professional liability cover and learns that it is on a claims-made basis. She compares it with an occurrence policy for her office premises and sees that the two work differently. She buys a tail extension so that she is covered for work done before she retires.
Think of it
An occurrence policy is like buying a ticket for a specific train journey. Once you take that trip, you hold the memory and the right to that experience forever, regardless of when you talk about it later.
Case study
Seen in the real world
Ashgrove Builders is a fictional construction firm created for this illustration. Over the years it changed insurers several times to save on premiums, and it kept a binder of old general liability policies, all written on an occurrence basis.
A claim arrived for damage to an apartment block the firm had finished six years earlier. The claim fell outside its current policy, but the finance manager located the policy from the year of construction and notified that insurer.
The illustrative result was that the old insurer accepted the claim up to the limit of that year's policy, $2,000,000, and the firm paid only a small excess. The incident led Ashgrove to appoint a person to maintain a central register of every policy, with its dates, limits and insurer.
Watch out
Common mistakes
- Confusing occurrence and claims-made policies, which can leave a company thinking it is covered for past events when it is not.
- Throwing away old policy documents, when they may be the only proof of cover for a late claim.
- Assuming today's limit applies to an old event, when the limit in the policy active at the time of the incident is what counts.
Questions
People also ask
What is the main difference from a claims-made policy?
An occurrence policy responds to events that happen during the policy period, while a claims-made policy responds to claims reported during the period.
Does an occurrence policy cost more?
Often yes, because the insurer remains exposed to the risk for many years after the policy ends.
Do I need to tell the insurer about an incident straight away?
Yes, since most policies require prompt notice of events that could lead to a claim, and delay can cause problems.