Claims-made vs Occurrence Forms?
A clear understanding of both types of coverage is crucial in making an informed decision on which type of coverage to buy. When one coverage is recommended over the other, in certain situations, it is not a matter of what is recommend but what the markets will allow. For certain types and kinds of coverage, a claims-made form is the industry norm. It could include the following coverage's:
Directors & Officer Liability
Employment Practices Liability
Fiduciary Liability and Employee Benefits Liability
These are examples of some types of coverage's that are predominately written on a claims-made form. Professional Liability, Sexual Abuse Liability and to a lesser degree General Liability coverage may at times be written on a claims-made form.
With respect to how the premium compares between claims-made and occurrence forms over time, we would note that claims-made policies involve a multi-year rating approach which plateaus at about the 5th year. This is when the policy matures, and we see premiums more comparable to those we find on occurrence policies. So, while in the beginning it may feel as though there is a discount it is not sustained for more than a few years.
While an occurrence policy will always be around to cover lawsuits regarding allegations during the time a prior policy was in force, a claims-made policy will only respond to a claim if there is a current policy in existence. The minute the claims-made policy ceases to be in force, the insurance coverage for your entity ends. To put it simply, it is as if your insurance never existed. The only way to counteract this is to purchase what’s called an Extended Reporting Period also referred to as an ERP or Tail. This allows the entity to extend the period to report claims. The duration is typically 12 to 60 months. There is a large premium consequence associated with the purchase of a tail.
From our experience, except for the claims-made policy, which steps up for the first 5 years and the necessity of a tail at the end of a policy, neither one is more susceptible to fluctuations in the rates (premium bouncing) than the other.
From an Underwriting standpoint:
On a claims-made form an underwriter must underwrite for all past exposures. So, if your revenue/exposures go down from one year to the next, that does not always mean that your premium will be reduced proportionally as the claims-made policy is still vulnerable to claims arising out of prior acts. While on an occurrence form, an underwriter underwrites purely for the exposures anticipated in the given year, as it will respond to claims arising during that policy term.
When it comes to marketing we have seen some insurance company underwriters require extensive prior claim information to consider quoting for risks that have long retro-active dates. If your retro date is 15 years old, they may request currently valued loss history reports going back for all those 15 years. While an occurrence underwriter will typically be satisfied with 5 years.
Although there are certainly situations where a claims-made form is necessary due to availability in the market place or because of the coverage type, by far the preference is to have policies written on an occurrence form.