Claims Made Versus Occurrence



The main difference between occurrence and claims-made policies lie in the relationship of coverage of claims to the policy period.

In occurrence coverage all acts (or omissions) within the policy period are covered regardless of when a claim is made. The purchase price, therefore, reflects the uncertainty and risk of future claims. From the insured's point of view this coverage is most complete but it is also initially the most expensive. From the insurer's point of view there are difficulties in pricing and reserving problems.

In claims-made coverage, incidents occurring within the policy period are covered providing the claim is made while the policy is kept in effect. In order to have coverage against claims which may arise after the policy has expired, additional coverage known as a reporting endorsement (or tail coverage) must be purchased for an additional premium (usually ranging from 150% to 200% of the final year premium). In effect, this reporting endorsement turns the policy into an occurrence form. The advantage to the insurer is that the period of risk is finite and, therefore easier to price and reserve against. This advantage is passed on to insureds by way of lower initial premiums. The unpredictability and risk of the cost of future claims is borne by the insured since the cost of the tail coverage is uncertain.