YOU ASK:

Explain the difference between a claims made policy and an occurrence policy?

WE ANSWER:

Liability claims are a tricky matter. It may come up during the course of your operations or it may come up years after you have provided a product or a service, even after you have ceased making or selling the product or after you have stopped provided the same service. A liability claim may come even when you are retired or have closed the business.

It is worth taking note that business insurance is offered in two forms-the claims made policy and the occurrence policy. The difference between the two should be explained to you by your insurance agent before signing the insurance contract. 

Claims made policy provides coverage for claims made during the period the insurance policy was effective. As long as the insured is paying the premium, this policy will cover any claims that will come up along the way. When the premium payments stop or when the policy owner decides not to renew the policy, the coverage stops as well. This means that any claims which occurred outside the coverage period will not be covered by the policy.

Occurrence coverage, on the other hand, provides coverage during the time the accident or act occurred. This is regardless of when the act was reported. This is the best option for business owners.

Here's a table that outlines the difference between the two:

Claims Made Occurrence
Coverage The insurance will cover claims made during the time the policy was effective. This insurance will cover events that happened at the time the policy was effective. This means that the insurance company is obligated to cover liability claims even years after the policy has ceased to be effective.
Premiums Charges lower premiums since it will only involve claims while the policy was in force. The premiums are more expensive because the insurance company may never know when claims can come up.
Amount of coverage The maximum claim amount is what is set in the policy. This usually can cover for standard claims. The coverage may be smaller, especially if the claim is made several years after. This is because the policy will not have taken into account the way your company has grown, claims cost, as well as inflation.
Extent of coverage The policy may be amended to cover claims that occur before the policy was effective. This is called retroactive dating. This does not cover prior acts, only events that cover the acts during the policy's effective date.
Tail coverage The policy can cover claims that may not have been made during the time the policy was effective. This depends on the deal being offered by the insurance company. Tail coverage is not relevant, since the policy will pay no matter how much time has already lapsed.
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