Claims-made vs. Occurrence coverages - Part 1

FC&S recently responded to a question from a subscriber regarding a policy for an insured who moved coverage from a claims-made basis to an occurrence form. Under the claims-made policy the insured had a retroactive date going back to 2002, but in the occurrence policy, while referencing a retroactive date of coverage, the retroactive date was shown on the declarations as the same date as the policy effective date: April 18, 2022. This is the first of a two-part series addressing the issues surrounding the differences in coverage. Part 2 of this series will appear on April 14, 2023.

So what happens when an insured decides to move from a claims-made policy to an occurrence-based policy, or vice versa? How does this affect claims under each coverage form, and how might the agent’s errors and omissions be triggered?

Claims-made vs. occurrence

First, we need to understand the difference between claims-made coverage and occurrence coverage. Stated simplistically, claims-made coverage provides coverage for claims that are made to the insurer during the policy term for injuries, wrongful acts, errors or omissions or whatever the coverage applies to (we’ll refer to these as injury) — as long as such injury was not committed prior to the retroactive date shown on the policy. Conversely, an occurrence policy covers claims that occur during the policy term and there is no need for a retroactive date, since the date of the occurrence is what triggers the coverage.

Frequently, all related claims are deemed to have been made at the time the earliest related claim was presented or when the first circumstance leading to the first related claim was reported. This is of importance, particularly in the case of abuse or molestation claims, where a perpetrator may act over a number of years against many individuals.

The retroactive date serves to preclude coverage for incidents that the insured knows about and that might have the potential to give rise to future claims. Let’s look at this claims example: In 2012, a school principal receives several complaints from parents that their children are being abused by the physical education teacher. The principal tells the school board and the school board fires the teacher. The insurance agent is notified of the incident, but no claim was made or reported.

Six years later in 2018, one of the students submits a claim for injury arising from the teacher’s abuse. Under claims-made coverage, the insured was made aware of the potential for a claim in 2012, but the claim was not made until 2018. The policy in force in 2018 will be the policy triggered for the claim, but since the insured was made aware of the claim potential in 2012, the policy retroactive date will need to go back at least as far as 2012 for the claim to be covered under the 2018 policy. If the retroactive date does not go back to 2012, coverage can be denied, as the insured was made aware of the incident that could give rise to a claim, and the policy does not cover prior acts. Since the agent was made aware of the incident but did not report a claim at that time, a potential errors and omissions claim exists.

Given the same claim situation under an occurrence policy, the policy that will be triggered is the policy in effect in 2012 when the occurrence took place, even though the insured reported the claim in 2018. There is potential for claim denial as the insured knew or had reason to know that a claim could arise from the complaints of the teacher’s abuse, and again there is the potential for an agent’s E&O claim if they did not notify the insurer.

Some claims-made policies may not specify a retroactive date, or the retroactive date may be the same date as the effective date. In these cases, there is no coverage for an incident or injury that takes place prior to the effective date of the policy.

Here’s a simplistic example of how an old claim just being presented for coverage will be treated under a claims-made policy, and under an occurrence policy:

ABC Corporation Claims-Made Policy

Effective: June 1, 2022 – June 1, 2023

Retroactive Date:  June 1, 2000

Date of Injury:  September 1, 2001

Date Claim Made to Insurer:  September 1, 2022

In this case, the date the claim is made to the insurer is the policy that will be triggered for coverage. This is the current policy of June 1, 2022 to June 1, 2023, because the injury took place after the retroactive date of June 1, 2000, and it was not previously reported to an agent or insurer under any of the preceding policy terms. If however, the injury took place prior to September 1, 2001, there would be no coverage under this claims-made policy.

If this was an occurrence policy, the policy triggered for coverage is the policy in effect from June 1, 2001 to June 1, 2002, which is the policy term in which the occurrence took place, regardless of the date it was reported.

An insured should establish a retroactive date that coincides with the inception date of the insured’s first (or expiring) claims-made policy, and should consider the purchase of a  supplemental extended reporting endorsement under the expiring claims-made policy, unless it wishes to self-insure its prior acts exposure.

Part 2 of this series will examine the factors surrounding tail coverage for this claim.

Karen L. Sorrell, CPCU  (ksorrell@alm.com) is the associate editor of FC&S Expert Coverage Interpretation, the authority on insurance coverage interpretation and analysis for the P&C industry.

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