Welcome to our multi-part educational series regarding Liability Insurance. In the coming weeks we will explore the components of liability policies to give a better understanding of how the policies protect insureds from liability exposures.
Nearly all contracts or agreements that obligate others to purchase insurance require a liability policy. Understanding the policy forms that are commonly used, for example Claims-Made and Occurrence, is crucial. One of the most significant differences between the two forms is the timing of the event that takes place that obligates the policy to respond or provide coverage.
Claims-Made Policy Definition:
A policy providing coverage that is triggered when a claim is made against the insured during the policy period, regardless of when the wrongful act that gives rise to the claim took place. The one exception is when a retroactive date is applicable to a claims-made policy; in this instance the wrongful act that gave rise to the claim must have taken place on or after the retroactive date.
Examples of policies typically written on a claims-made basis:
- Professional Liability
- Errors and Omissions Liability (E&O)
- Directors and Officers Liability (D&O)
- Employment Practices Liability Insurance (EPLI)
- Contractors Professional Liability (CPL)
- Contractors Environmental Liability (CEL)
- Environmental/Pollution Liability
- Umbrella Liability (can also be occurrence)
Purpose of a Retroactive Date:
- to eliminate coverage for situations or incidents known to insureds that have the potential to give rise to claims in the future
- to prevent coverage for “stale” claims that arise from events far in the past, even if such events are unknown to the insured
- It is important to note the retroactive date does not apply to “prior acts”, only to bodily injury or property damage deemed to have occurred before the retroactive date
Coverage Trigger:
- the event that must occur before a policy responds to a given loss
- the reporting of a claim is the coverage trigger on a claims-made policy form
- the date of the claim report is deemed to be the date of the loss event
Tail Coverage:
- provision found within a claims-made policy that permits an insured to report claims that are made against the insured after a policy has expired or been cancelled
- the wrongful act that gave rise to the claim must have taken place during the expired/cancelled policy period
- the insured is required to pay additional premium in order to secure tail coverage
- applies for a limited time period, generally 1 year
- purchasing tail coverage for a specific time period does not reinstate the policy’s aggregate limit of liability
Occurrence Policy Definition:
A policy covering claims that arise out of damage or injury that took place during the policy period, regardless of when claims are made. It provides a separate coverage limit for each year the policy is in force. It does not matter if the policy is active when the claim is reported; it only matters that the policy was active when the claim occurred.
Examples of policies typically written on an occurrence basis:
- Commercial General Liability (CGL)
- Automobile Liability
- Umbrella Liability (can also be claims-made)
- Workers Compensation and Employers’ Liability
Coverage Trigger:
- the event that must occur before a policy responds to a given loss
- the occurrence of injury or damage is the coverage trigger on an occurrence policy form
- liability will be covered under the policy if the injury or damage occurred during the policy period
- the claim does not need to be reported during the policy period
The primary difference between a claims-made and occurrence liability is all about the timing, or coverage trigger. What event has happened and when did the event take place?
#teamkoppinger can help you navigate these policy forms
Contact us for answers to your questions