Every business should think about protecting itself against liabilities that may be involved with your activities with members of the public, business partners and clients or customers. These exposures are covered by a number of business insurance policies but business owners should be aware that the insurance terms and ability to access claims support may differ significantly.

Claims made and claims occurring — what's the difference and why you need to know

There is a critical distinction in claims models: the 2 types are claims made policies and claims occurring policies, and the main differences relate to the time an incident occurs and when a claim is raised. For example, an incident may occur at a business which is only raised as a claim 2 years later.

The business may no longer have insurance that they had 2 years ago, or they may have a different policy — so if the incident and claim occur in different policy time periods, the insurance cover may not be valid. Understanding the claims model for different types of insurance is key to avoiding being uninsured for potential incidents or claims that may arise in future.

Claims made insurance policies — support only claims made within a policy period

A claims made policy only covers incidents that both occur and are reported within the stipulated period the policy, unless an extension or 'tail' is purchased.

Business insurance cover that is typically claims made includes

  • professional indemnity insurance (errors and omissions)
  • directors and officers' liability insurance
  • management liability insurance
  • employment practices liability insurance.

With a claims made policy your insurance cover only applies if you file a claim between the dates that the policy is active — between the date the cover commences and the date when it lapses. In other words, the claim needs to be filed while you are actively covered. If you have cancelled your insurance or allowed the policy to lapse you will be uninsured and unable to claim.

A retroactive claim for a loss can only be raised in a situation where the cover has been ongoing during that period. From the first time you take out the insurance the effective retroactive date is when your policy started. If you subsequently renew the policy the retroactive date remains the earliest date from which you continuously keep your cover active. If you renew with another insurer you may be able to negotiate the same retroactive date but you should be prepared for new terms to apply.

For example, if claims made cover was in force with insurer A between 2016 and 2017, then subsequently transferred to insurer B, if a claim was then first notified to the insured business in 2018 in relation to an incident that occurred in 2016, then assuming it was the first time the business was made aware of the claim, insurer B policy would respond.

But if in 2016 the insured business was made aware of the facts giving rise to the claim but took no action insurer B would not respond, as it would be a prior known circumstance. Insurer A would also not respond, as the claim was made post policy expiry and the facts were not notified in 2016.

If the insured business notified insurer A at the time they became aware of facts in 2016 and subsequently made a claim in 2018 the policy would respond, but be aware that continuous cover clauses and/or retroactive dates can alter the context in terms of which policy responds.

All claims made policies stipulate that claims must be made during the policy period. Some insurers offer the option to purchase an extended reporting period, or 'tail' coverage, on their claims made insurance policies that allows you to claim on a loss that occurred during the prior policy period. This extends the period during which you can make or notify a claim — but it doesn't extend your active cover — and the triggering incident has to have occurred before your policy lapses.

Claims occurring insurance policies

A claims occurring policy offers lifetime coverage for incidents that occur during the policy period, regardless of when the claim is reported.

Business insurance cover that is claims occurring includes

  • public and products liability insurance
  • business property insurance
  • motor vehicle insurance.

A claims occurring policy covers any loss that happens while your insurance policy is active and enables you to claim retrospectively in instances where issues come to light after the period of the policy has ended. Most business liability insurance cover is available on this basis.

To be eligible to claim retrospectively the loss or trigger event needs to

  • be caused by an event that takes place within the geographical scope of the cover
  • occur during the policy period
  • not be known to you before the period of the policy commencing.

For example, a shopping centre might have had public liability cover from insurer A from 30 June 2016‒30 June 2017 and then renewed its cover with insurer B for the 30 June 2017‒30 June 2018 period.

On 26 August 2016 a customer slipped on a discarded coffee cup on the ground in the shopping centre and reported the incident to centre management that she had hurt her right ankle and hip. The centre responded by agreeing to pay her minimal physiotherapy costs without making an admission of liability.

Then on 15 November 2017 the centre was served with a public liability claim, with the customer alleging a breach of duty of care for failure to adequately clean the floors in the centre and claiming a significant whole person impairment and medical costs.

In this scenario insurer A would respond to the claim because the incident occurred during Insurer A's period of risk. It is not relevant that the claim was made during Insurer B's period of risk.

The basis of the claims cover affects your business protection

In light of the difference in the claims basis on which insurance cover is offered businesses may be more likely to opt for claims occurring cover in preference to the cheaper claims made for policies, where it's available. Professional liability is one exception that's usually only offered on a claims made basis.

Distinctions between business insurance policies and understanding the full scope of cover is a key area where insurance broker knowledge and advice provides critical assistance. Our Gallagher business insurance experts are here to help.

Disclaimer

Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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