Claims made or claims occurring – understanding the differences
04/02/2023
A key consideration when sourcing or renewing insurance is ensuring you will continue to have sufficient cover in place no matter when an insured event takes place.
Although limitation periods apply to many types of claim made in the civil courts – including personal injury, professional negligence and breach of contract – judges sometimes have the discretion to extend these limitation periods.
This means that organisations could face claims relating to events that took place many years earlier. It’s important to understand how claims will be dealt with under different insurance policy wordings.
Claims made vs claims occurring – what’s the difference?
Under a ‘claims made’ basis of cover, only claims made and reported during the policy period (or between the retroactive date and policy end date) will be accepted by the insurer.
Under a ‘claims occurring’ basis of cover, a policy will provide cover for an insured event that occurs within the policy period, regardless of whether the claim is made during the policy period or some time afterwards (providing it is not statue barred).
These different approaches can sometimes lead to confusion. Challenges can also arise if an organisation decides to cancel a policy mid-term or switch insurer at the end of the policy period. Every time an organisation starts a new policy on a claims made basis, they will need to consider if they are happy to have cover from their policy start date, or if they want to request a different retroactive date.
Example: An organisation has a policy on a ‘claims made’ basis with Insurer A, which runs from 1 January to 31 December 2023. It decides to switch to a new policy with Insurer B on a ‘claims occurring’ basis, with cover beginning on 1 January 2024. An insured event occurs on 1 November 2023, but it is not reported until 2 January 2024. In this example, the organisation could find itself being unable to make an insurance claim under either policy. Insurer A would not have to settle the claim because it was made after the ‘claims made’ policy ended. Insurer B would not have to settle the claim because the claim ‘occurred’ before its cover began.
To avoid this kind of scenario, the organisation would need to agree an extended reporting period with Insurer A – a period of time after the policy end date during which claims can still be reported, or the organisation could ask Insurer B for ‘run off cover’. Run off cover would enable a claim to be made for a policy that has been held in the past.
The importance of understanding the retroactive date
In order to ensure adequate cover is in place for historical claims, a key consideration with a claims made policy is the retroactive date.
This can either be either the date the policy was first incepted, or a date in the past that you specifically request from your insurer. Every time a policy is renewed on a claims made basis, the retroactive date should be carried forward to ensure you are covered for all claims made since the policy first began.
Example: A policy is taken out on a claims made basis on 1 January 2015 with Insurer C. This date is used as the ‘retroactive date’ and is carried forward each year the policy is renewed, meaning the policy will continue to cover claims made in subsequent years, relating to any period from 1 January 2015 onwards until the policy is cancelled in 1 January 2020. The decision is taken to move to Insurer D but stay on a claims made basis on 1 January 2020. If a customer makes a claim for something that happened in 2017, neither Insurer C or D would have been providing cover. Whereas if the customer established a retroactive date of 1 January 2015 with Insurer D, it would enable them to claim for something that happened in 2017.
Which is the most appropriate basis of cover for my organisation?
There is no simple answer to this question, as the availability and suitability of cover will vary for different organisations. It is important, however, that whichever basis of cover you choose, you understand the potential considerations and any risks that your organisation might face.
Claims-made basis of cover: key considerations
- Your protection against historical claims is dependent on your ability to source ongoing retroactive cover
- As required retroactive cover periods extend over time, the cost-premium advantage could diminish
- You may need to provide evidence of historical, as well as current risk management practices, in order to secure retroactive cover
- Claims-occurring basis of cover: key considerations
- If switching from a policy on a ‘claims-made’ basis, you will need to ensure you have sufficient run-off/extended reporting cover in place to reduce the risk of gaps in cover
- You will need to provide evidence of the cover in place at the time of an insured event in order to be indemnified.
- Good record-keeping is essential in order to be able to produce records of relevant insurance policies in force years (or possibly decades earlier).
If you have any questions about your basis of cover, or want to understand more about how a policy might respond in different circumstances, please speak to your usual Zurich contact.
