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Claims Made, Occurrence Coverage FAQs

Woman working comparing documents with a computer sitting in a desk at officeDate: May 2021

Ensuring a contractor has adequate insurance is an important step in the risk management process. But the form—claims made or occurrence—of that insurance can have a significant impact on how or even if a contractor’s coverage will apply when a loss occurs.

This often confusing aspect of insurance coverage sparks frequent questions from members, which MCIT answers here.

What’s the Difference Between Claims Made and Occurrence Insurance?

The extent of coverage provided by each form may be exactly the same, but the difference lies in what causes the policy to respond. The primary difference relates to whether insurance will apply to a claim that is discovered or reported after a contractor’s policy expires.

Occurrence coverage: This coverage form responds to claims or lawsuits arising from an incident that occurs during the time the policy is in force. Although insurance companies may adopt differing definitions of the words “accident” and “occurrence,” simply put, the key to activating coverage is the date that the accident actually happened. Occurrence coverage will respond to covered claims brought years after the policy ended, as long as the policy was in force at the time of loss.

However, an element of risk remains whenever members are faced with a loss or claim that is not discovered for several years. There is no guarantee that an insurance company in business when the loss occurred will still be around 20 years later.

Claims made coverage: This coverage form responds to claims that are made (reported or filed) while the policy is in force. Coverage will be provided only so long as the insured continues to pay premiums and renews the policy. When the policy is no longer in force, coverage stops for any claims that are not known or reported to the insurance company prior to the policy’s termination.

With a claims made policy, three dates must be known or determined to initiate the policy response.

  1. The date of occurrence: “Occurrence” is defined in the coverage terms, but for purposes of this discussion, MCIT assumes there is no difference between the claims made and occurrence coverage forms as to the definition of when the claim occurred.
  2. The retroactive date: This is a provision in claims made coverage that eliminates coverage for accidents that occurred prior to a specified date (the retroactive date). If the covered accident occurred prior to the retroactive date, the policy will not respond to the loss. On the other hand, if the covered accident occurred after the retroactive date, the policy in effect at the time the claim is made will respond to defend and/or pay the claim. (See “More Details About Retroactive Date.”)
  3. The date the covered claim is made: Typically, this is the date that the claim is reported or filed with the insured contractor and/or its insurance company. Some coverage forms might consider a claim to be made when the insured contractor is first aware that a claim will be presented.

Determining each of these dates is essential to prompting coverage on a claims made basis. The date of occurrence must be after the retroactive date, and the date the claim is first presented or made must fall within the period that the claims made policy is in effect.

If the claims made policy is no longer in force, any claims that were not known to have occurred or were not made while the coverage was in effect would not be covered unless the contractor had purchased an extended reporting period endorsement (also known as tail coverage).

This endorsement extends the timeframe in which claims may be reported under the canceled or terminated claims made policy. Extended reporting periods may be several months or years. Extending the reporting period can be expensive and prove unaffordable.

More Details About the Retroactive Date

The retroactive date in a claims made policy is typically the date that coverage was first placed with the insurance carrier, but it can vary greatly.

If the contractor has not been in business for long or only recently purchased coverage on a claims made basis, the retroactive date may slightly precede the effective date of coverage. However, the retroactive date may pre-date the effective date by several years if the contractor changed insurance companies but purchased coverage for “prior acts.”

Which Form Does MCIT Recommend?

Members should develop specific insurance requirements for each project or contract. In most circumstances, MCIT recommends contractors provide occurrence coverage. However, certain types of insurance may only be available on a claims made basis.

For example, most professional liability policies are offered exclusively as claims made coverage. Professional liability insures against errors, omissions or unintentional wrongful acts and should be required of any contractor or consultant who provides advice or delivers a service. Examples of professionals who should carry professional liability coverage include medical service providers, consultants, technology professionals, architects, engineers and attorneys.

What Should We Do When …?

Following are two situations MCIT members encountered when entering into contracts. The examples illustrate the need to evaluate each project individually.

Example 1: Professional Liability Coverage Canceled Once Project Completed

The member prepared bid specifications for a project involving significant upgrades to a software program. The insurance requirements called for the technology consultant to carry professional liability coverage. A prospective bidder called the member and asked if this requirement could be waived. The consultant stated the cost of coverage was prohibitive. The consultant went on to explain that for previous projects, he had only purchased professional liability coverage if the cost of the job was significant and then canceled coverage immediately upon completion of the job.

If the consultant purchases coverage on an occurrence form, coverage will be available for covered claims based on when the negligent act occurs regardless of when it is reported. The negligent act is typically deemed to have occurred while the consultant was performing the work. Therefore, if coverage were provided under an occurrence policy today, it would not matter whether the claim is reported now or at some time in the future.

However, if the consultant purchases insurance on a claims made form, only claims discovered and reported while coverage (or an extended reporting period endorsement) is in effect will be covered. The consultant will have no coverage if he secures a claims made policy and cancels it immediately upon completion of the project (as he had done in the past) and damages are not discovered until after the claims made coverage terminates (and any extended reporting period expires).

The member’s risk management options:

  1. The member could require that all coverage, including professional liability, is written on an occurrence basis. This might preclude some consultants from bidding because it is likely that they will only be able to purchase professional liability coverage on a claims made basis.
  2. If only claims made coverage is available, the member could include a requirement that an extended reporting period endorsement be purchased upon cancellation or nonrenewal, or require proof of continuing coverage for a specified period post-completion of the project. The member should choose the length of time based on its risk tolerance.
  3. If the member is not bidding the project, the requirements should be in the contract.
  4. The member might also ask the consultant how long his or her professional liability coverage has been in effect. If it has been a number of years, that could indicate that the consultant would not likely cancel the policy. But there may be mitigating factors and no guarantees exist, so at best, the response could offer an indication of future behavior.

Example 2: Liability Coverage Only Available as Claims Made

The member is entering into an agreement with a nationwide, nonprofit organization for specialized assistance in the event of an emergency. The insurance requirements in the member’s contract state all liability coverage must be written on an occurrence basis. The attorney for the nonprofit advises the member that the organization’s general liability and professional liability policies are on a claims made basis. The organization has no interest in changing its coverage form.

The primary risk with claims made policies is that coverage will not be in force when a claim arising from the member’s project is discovered or reported. In this situation, the member should weigh the benefits of entering into the contractual agreement against the risk that this organization will discontinue its claims made coverage and fail to purchase an adequate extended reporting endorsement.

The member’s risk management options noted in Example 1 apply to the circumstances in Example 2 as well.

Future Considerations

Members’ primary concern about occurrence versus claims made coverage relates to whether contractors’ insurance will respond to a claim that is discovered or reported after coverage has ended. Members should remember that claims not covered by the contractor’s insurance will be the member’s responsibility.

Typically, members are aware of claims arising from the negligence of contractors soon after the work has been completed. In this situation, the contractor’s coverage is generally still in force. However, circumstances may occur in which a claim arises years or decades later. Coverage for claims made after the contractor’s policy has expired may depend on several factors. Most important, though, is the coverage form.

The information contained in this document is intended for general information purposes only and does not constitute legal or coverage advice on any specific matter.