Small Business Insurance basics: Insurance coverage triggers – Occurrence vs Claims-made

There is a popular belief in Small Business insurance that customers don’t read their policies (and, given policies often exceed 100 pages in length, can we really blame them?) – thus, what’s in the document doesn’t really matter. People buy on price – and that would probably be ok, if only it wasn’t the coverage that governed whether or not you get paid when you are in a situation that requires you to file a claim.

Well, if you are a Business owner who cares about the quality of your coverage and would like to go beyond blindly trusting your agent, I invite you to follow our blog – we will cover key terms that describe and define coverage’s that are appear most often and matter most when thinking about Small Business Insurance.

Today, we’ll talk about “triggers” – conditions that need to be true for a claim to “trigger” coverage. A Small Business policy will typically offer Occurrence or Claims-Made coverage – and sometimes a mix of both. What are these, why are they important, and how should they impact your decisions?

What does Occurrence and Claims-made mean?
An Occurrence policy will protect you if the incident that led to the losses the claim is filed for occurred while the policy was in effect. For example, if someone is injured at your work site while the policy is active, you would be eligible for coverage even if the victim files a lawsuit against you a year later, when your coverage has lapsed.

In a Claims-made policy, on the other hand, the coverage is triggered only if the incident occurs and the claim is reported while the policy is in effect. Using our example above, if someone is injured while the policy is active but files suit later and you end up filing a claim after your policy expired, you would not be eligible for coverage under this policy. There are mechanisms that provide a grace period where the insured is eligible for coverage for a certain amount of time after the policy expires (and is not renewed) – these are typically referred to as the Extended Reporting Period, and tend cost as much or more than the policy itself.

Are there cases where Claims-made coverage is the right choice for me?
Claims-made coverage tends to be cheaper – particularly the first 1-2 years of the policy – and tends to go up year-over-year, as the exposure the insurer is taking goes up. Some coverage’s (for example, Employee Benefit Liability Coverage) are only offered on a claims-made basis – often because it’s tough to pinpoint the exact time an incident occurred.

Also, if you don’t intend to ever switch insurers (and there’s no chance that the insurer will choose to not renew your policy, goes out of business, or stops issuing policies in your vertical/geography), there isn’t a huge difference between Occurrence and Claims-made (other than some technicalities about how limits work – Occurrence does give you more generous limits in most cases). But is this a scenario you would want to bet on?

Where a choice does exist – for example, with General Liability and Professional Liability coverage, Occurrence-based coverage is simpler to understand and to apply and – in other words, should you decide to move to another insurer, you don’t create the significant gap in coverage you would face with a Claims-made policy.

This is complex and confusing. Is it even worth trying to understand?
Yes, this is a complex topic. Is it even worth trying to figure out insurance terminology? Traditional industry experts will say – not at all, that’s what your agent is for! We disagree. We recommend you educate yourself using resources like this blog (and many others out there!) and work with an insurance provider who is comfortable providing full transparency into the coverage they are selling.

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