General Liability policies can be written on either occurrence or a claims-made basis. It is very important to understand the difference between the two. The sought-after General Liability Policy form is written on an Occurrence Basis and not on a Claims-Made Basis. There are significant ramifications to purchasing a Claims-Made policy and we believe you should be aware of what it means as it can cause serious gaps in insurance and or hidden costs later down the line.
Occurrence: The sought-after form stamped issued and approved by Insurance Service Office Inc. in America is written on an Occurrence Basis. If someone is injured today, but a lawsuit is not brought until a future date, say for example 10 years from now, the policy you had in force when the plaintiff was injured will cover the claim.
Claims-Made: Claims-Made policies are triggered by the filing of a claim. If someone is injured today, but a lawsuit is not brought until a future date, the policy you have in place when the lawsuit is brought will cover the claim. This works as there is a date called a retroactive date on a claims-made policy. The retroactive date is a specific date (day, month, year), usually the date you first purchase coverage and it never changes even in future years. The first year’s policy will pick up all potential claims dating back to the retroactive date (one year of potential claims), the second policy period will pick up all claims dating back to the retroactive date (two years of potential claims), the third policy period will pick up all claims dating back to the retroactive date (three years of potential claims) and so on.
Once you close your business, and you stop purchasing insurance, what insurance is covering future claims brought? For example, what if a customer is hurt today, you close your business tomorrow and stop purchasing insurance? What policy is covering this claim? Because of this, claims made policies necessitate the purchase of an expensive “tail” policy or an extension of your coverage for a period to cover
allegations brought in the future for past events when you had coverage in force. These policies can be expensive and often are limited in the period for which they can be extended. For example, some claims made insurance policies only offer a three-year extension. What if a lawsuit is brought four years after an injury and you only purchased the three-year extension? What insurance is covering that claim? The answer is none.
Here is an article in which Gwyneth Paltrow was sued years after a skiing incident:
Click Here To Read The Article.
Tail insurance policies can cost a significant amount of money and can create gaps in coverage. This can be effectuated by a business ceasing to operate and therefore not purchasing coverage, a change in ownership, or even switching to an occurrence policy later in the life cycle of your business. If you are with a claims-made general liability policy and the insurance company increases rates and you decide to move to an occurrence policy, this will trigger the necessity to purchase a tail policy to avoid creating a gap as again with an occurrence, you always have coverage for events that took place in the past, but if you have a claims-made policy, and you move to an occurrence, without purchasing a tail, you do not.
In short, you may decide that a claims-made policy is right for your business at first, but we believe it is important to also understand the potential pitfalls for you to make an educated decision.