Claims-made. Occurrence policy. Coverage trigger. It can feel like commercial insurance has its own foreign language sometimes. But don’t worry, all of these terms can be broken down into plain English: claims-made and occurrence policies are simply the names for the two basic types of commercial liability policies. The difference between them is how their coverage is activated, or triggered – in each of these policies, the timing of the “triggering” event is key. Let’s take a closer look at what is meant by coverage trigger, how these policies work, and which type you can expect to be offered when choosing a policy.
As you already know, purchasing commercial liability insurance alone or as part of business owner’s policy is an important part of protecting your business. This type of policy covers you for any damages that you are legally required to pay following an occurrence that causes bodily injury or property damage. The word “occurrence” here actually has a definition: according to the International Organization for Standardization (ISO), an occurrence is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In plain English, what all of this means is that you pay your premium, and, in exchange, your insurance company takes on the risk. They pay any claims made against you, whether they be for a customer slipping on a wet floor, a pipe bursting due to your faulty plumbing work, or any other accident that leads to damages.
The occurrence described above is what leads to the claim being made against you – or “triggers” your coverage – which is why it’s called a coverage trigger or trigger of coverage. This is not to be confused with another term you may have heard: conditions of coverage. Conditions of coverage are the actual steps you have to take after the coverage trigger occurs, including notifying your insurance company of the claim and providing any evidence or documentation required.
Now that we’ve gone over what a coverage trigger actually is, we can look at how the timing of the trigger makes all the difference in the two different types of liability policies. What matters in a commercial liability policy is when the occurrence happened versus when the claim was made. An occurrence policy is triggered by an injury or accident that takes place during a specific coverage period. It does not matter when the claim is made, just when the occurrence happened.
For example, let’s say a plumber buys a liability policy on an occurrence basis, with an effective policy date from January 1, 2019 – December 31, 2019 and a claim is reported against them in February 2020, for faulty work that they did in March 2019. This claim would be covered under their policy, because the damage that triggered the claim took place within the policy period. It would not matter if the claim was reported after December 31, 2019.
These types of policies are particularly useful for covering things like product liability, environmental liability, occupational diseases, or other things that can have a longer reporting or settlement time.
While most liability policies purchased by small business owners are occurrence policies, there are some types of policies, like errors and omissions, which are usually written as claims-made. Some small business owners, however, choose to buy claims-made policies simply because they are usually the cheaper of the two. This is because they tend to provide less coverage; occurrence policies are more expensive because there isn’t a time limit on when a claim can be reported and still be covered. This is not the case with claims-made policies.
When a policy is written as claims-made, it means that the policy will only cover incidents reported during the active policy period and after the policy’s start date, or retroactive start date, if that applies. A retroactive start date is the specific date the policy’s coverage begins. This is usually the policy’s effective date, or a date in the past that you and your insurer agree upon. If you’re shopping for a claims-made policy, it’s best to look for one without a retroactive date, so that you have a longer range of coverage. In addition, if you’re looking for more coverage with a claims-made policy, you can add a provision known as an extended reporting period, or “tail coverage,” to your policy to extend the amount of time you can report a claim after the policy’s cancellation.
An example of how claims-made policies work is as follows: the plumber from above purchases a claims-made liability policy with the same effective date of January 1, 2019 – December 31, 2019, but because it is claims-made it has a retroactive start date of October 1, 2018. If the plumber causes the damage on November 10, 2018 and the claim is made on March 2, 2019, it will be covered because it occurred after the retroactive date and was reported during the policy period. If the work had been done prior to October 1, 2018 or if the claim had been reported after December 31, 2019, it would not have been covered.
We get it, there’s a lot to learn when you’re shopping for commercial insurance. But the time spent researching is worth it: finding the right kind of insurance for your business can mean the difference between protecting it and losing everything you’ve worked so hard for. But remember, you don’t have to go it alone – EZ.Insure is here to help. We’re ready to set you up with your own personal agent who will answer all your questions, walk you through the process, and sign you up when you’re ready – all for free. Get started with us today by entering your zip code in the bar above, or you can speak to an agent by calling 888-615-4893.