When you’re a business owner, you need to make sure that you and your business are covered in case of events such as property damage, injury, or malpractice.
However, that doesn’t mean choosing the right insurance policy is easy. It’s important to find a balance between low premium payments and ensuring you’re covered in case of an event.
Most business insurance policies fall under one of two categories: claims-made vs. occurrence.
Before you choose your business insurance, make sure you know the difference between these basic policy types. Otherwise, you could end up spending too much money or getting caught without enough coverage.
Business Insurance: What It Is and Why You Need It
Simply put, business insurance protects businesses from any possible liability that occurs as a result of business operations.
There are several types of business insurance, including:
- Commercial Property
- Product Liability
- Professional Liability
- Workers’ Compensation
It’s crucial to know what type of insurance your business needs so that you can estimate how much money to budget.
The type of insurance you need for your business depends on several factors such as:
- Business Size
- Product Or Service Type
- Location
Although each business owner needs to figure out which insurance combination is best for their business, there are some legal requirements to consider.
Legal Requirements for Business Insurance
According to the federal government, any business that has employees must purchase workers’ compensation, disability, and unemployment insurance. In some cases, you may qualify for a workers’ comp exemption.
Furthermore, the federal government states that all businesses that rely on customer contact must have some form of liability insurance. Business liability policies cover injury to customers or employees.
Each state has different business insurance requirements, too. For the most up-to-date information, visit your state’s website.
There are several types of business liability policies. This article covers the two main types of general liability insurance, claims-made vs. occurrence. General liability insurance is required for almost all businesses.
Both types of general liability policies protect businesses that are sued for:
- Bodily injuries that happen on a business’s commercial premises
- Damage that a business causes to someone else’s property
- Advertising injury, including slander or copyright infringement
After you get your general liability coverage, you can choose to supplement it with product liability or professional liability insurance.
By now, you’re probably thinking, “What’s the best policy type — claims-made or occurrence?”
The primary difference between claims-made and occurrence policies comes down to the flexibility of claim report times. Read on to learn more about how each policy works.
How a Claims-Made Insurance Policy Works
A claims-made policy provides coverage whenever a claim is made against it, as long as the policy is active.
In other words, even if there’s a delay between the event and the claim, you’re covered as long as the claim was made during the policy period.
Claims-made policies often include a retroactive date. If a retroactive date is written in the policy, then events that happened before that date are not covered. Typically the retroactive date is the inception date of your first policy.
When you renew a claims-made policy, the retroactive date shouldn’t change.
A claims-made policy only covers events that occurred during the policy period. However, there are two types of claims-made policies: pure claims-made and claims-made-and-reported.
Pure Claims-Made Policy
A pure claims-made policy requires that the accident or injury occurs during the policy period or extended reporting period in order to receive coverage.
However, you are not required to report the accident to your insurer before your policy expires. You just need to report the accident to your insurer as soon as possible.
Claims-Made-and-Reported Policy
A claims-made-and-reported policy requires that the claim be made and reported to the insurer during the amount of time the policy was active.
For example, you have a claims-made policy with a retroactive date of Jan. 30, 2020 that expires on Jan. 30, 2021. You are notified of a lawsuit against you on Dec. 10, 2020. Under a claims-made-and-reported policy, you must report the lawsuit (the claim) to your insurance carrier before Jan. 30, 2021 if you want to receive coverage.
Otherwise, if you have a pure claims-made policy, you may still be covered even if you report the incident to your insurer after Jan. 30, 2021, so long as you report in a timely manner.
Pure claims-made policies offer more flexible coverage and therefore are preferred over claims-made-and-reported policies.
Extended Reporting Period or Tail Coverage
Finally, you can opt to add an extended reporting period (ERP), also known as tail coverage, to your claims-made insurance. Tail coverage extends your insurance coverage for a limited time if your policy is canceled or you switch providers.
Often, your insurance company will automatically include a basic ERP in your claims-made policy. Extended reporting periods are short — typically 30 or 60 days.
How an Occurrence Insurance Policy Works
An occurrence policy covers any damages that occurred while the policy was active.
Unlike a pure claims-made policy, the claim itself doesn’t have to be filed while the policy is active. As long as the cause of the accident or damage was done during the policy period, you can still file.
This is useful when the damage caused might not become evident until after the policy expires.
In other words, someone may sue you for damage after your policy expires. As long as the cause of the damage occurred while your policy was active, your insurer must provide coverage.
This makes occurrence policies an excellent choice for businesses that pose a risk of damage or injury long after the incident occurs, such as exposure to harmful chemicals.
Often, they are written to include lifetime occurrence coverage for employers and their employees. The insurance will still cover claims that occur in the policy period, even if you don’t renew the policy.
Although occurrence policies may offer lifetime coverage, they usually include a cap on the total coverage available — for example, an annual coverage cap that resets every year. So, if a company purchases coverage with an annual cap of $2 million for five years, the maximum coverage allowed is $10 million.
Comparing Policies: Claims-made vs. Occurrence
So, if it’s claims-made vs. occurrence, which type of policy is best?
The answer depends on several factors, including your budget and the risks associated with your business’s operations.
Here, we compare the two policy types in terms of simplicity, coverage limits, and overall cost to help you decide which option is right for you.
Best for Simplicity
When comparing the two policies, occurrence policies are more straightforward. With lifetime coverage, you don’t have to worry about retroactive dates or extended reporting periods.
Even if you switch providers, your occurrence policy still provides coverage for damages that occurred while it was active.
Claims-made vs. Occurrence – Best for Simplicity: Occurrence
Best for Coverage Limits
When choosing an insurance policy, you need to understand your coverage limits, including:
- Aggregate Limits: The total amount of coverage available for future claims
- Per-occurrence Limits: The maximum amount your insurance will pay for a single incident
When you purchase an occurrence policy, your aggregate limit resets annually. As long as you continue to renew your policy each year, you have a higher coverage limit.
On the contrary, let’s say you purchase a claims-made policy worth $1 million. If you are sued for $1 million in the first year, you won’t have any coverage left for the remainder of your policy. In this case, you’ll have to increase your policy limit to be insured.
In the question of claims-made vs. occurrence, occurrence policies generally offer the best total coverage.
Claims-Made vs. Occurrence – Best Coverage Limits: Occurrence
Best for Overall Cost
When analyzing claims-made vs. occurrence in terms of price, claims-made policies gain the upper hand. Just think about it.
Occurrence policies offer more flexible coverage and higher overall limits since they reset each year. These benefits understandably come at a higher cost.
In general, claims-made policies offer lower initial premiums. However, in the long run, most businesses opt for occurrence policies.
Claims-made vs. Occurrence – Best Overall Cost: Claims-Made
Claims-made vs. Occurrence: Better Overall
Claims-made is the best policy for newer businesses that require lower insurance premiums.
Occurrence is generally the best overall solution for established businesses that want to ensure they are fully covered for general liability claims.
Choosing the right business insurance can be challenging, but you can ensure that your business is adequately covered with the correct information. The first question you need to answer is, “Claims-made or occurrence — which makes the most sense for my business?”
Once you’ve figured out your general liability coverage, you can assess whether you need supplemental coverage.
This is a guest post by Maddy Osman, a contributor at Hourly. Hourly is a people platform that helps small businesses save time and money by seamlessly connecting the dots between workers’ compensation insurance, time cards and payroll.
