Understanding Claims-Made vs. Occurrence-Based Insurance Policies: What Business Owners Need to Know

Understanding Claims-Made vs. Occurrence-Based Insurance

Policies: What Business Owners Need to Know

Business owners face a wide range of risks every day, from customer injuries to professional liability claims. One of the most critical decisions in managing risk is choosing the right insurance coverage. However, many business owners find themselves confused when selecting between claims-made vs. occurrence-based insurance policies. Without a clear understanding of these policy types, businesses can end up underinsured or mistakenly believe they have coverage when they do not.

Adding another layer of complexity, tail insurance (also known as an extended reporting period endorsement) plays a crucial role in claims-made policies. Without it, a business can be left unprotected when switching insurance providers or closing down operations.

This post will break down the differences between claims-made and occurrence-based insurance policies, how they impact coverage, and when tail insurance is necessary. By the end, you will have a clear understanding of which type of policy best fits your business needs and how to ensure continued protection against liability risks.

Claims-Made vs. Occurrence-Based Policies: The Core Distinction

The main difference between claims-made and occurrence-based policies is when coverage is triggered. This difference is crucial because it determines whether an insurance company will provide coverage when a claim is filed.

Occurrence-Based Policies: Coverage Tied to the Incident Date

An occurrence-based policy provides coverage for any incident that occurs during the policy period, regardless of when the claim is reported. This means that as long as the incident happened while the policy was active, the insurer will cover the claim—even if it is reported years later.

For example, suppose a customer slips and falls inside your store in 2020 while you had an active occurrence-based general liability policy. However, the customer does not file a lawsuit until 2023. Even though you may have switched insurance providers or canceled your policy by then, the occurrence-based policy that was active in 2020 would still cover the claim.

This type of policy is often preferred by businesses that want certainty that past incidents will remain covered, even after they switch providers or discontinue insurance coverage. It is common in general liability insurance, commercial property insurance, and some professional liability policies.

Many business owners find themselves confused when selecting between claims-made vs. occurrence-based insurance policies.

Claims-Made Policies: Coverage Tied to the Claim Date

A claims-made policy provides coverage only if the claim is made while the policy is active. Unlike occurrence-based policies, the timing of when the claim is reported—not when the incident occurred—determines whether the insurer will cover it.

For example, imagine that in 2020, your company had a claims-made professional liability insurance policy. In 2023, a client sues you for an error you allegedly made in 2020. If you have since canceled or switched your insurance policy and do not have a tail policy in place, your previous insurer will not cover the claim, even though you had coverage at the time of the incident.

Because of this limitation, claims-made policies typically require continuous coverage for protection. If a policy is canceled or allowed to lapse, all past coverage may be lost unless tail insurance is purchased.

Claims-made policies are most common in professional liability insurance, including errors and omissions (E&O) insurance, directors and officers (D&O) insurance, and medical malpractice insurance.

Which Type of Policy is Better for Your Business?

The choice between a claims-made and occurrence-based policy depends on the type of business you run, the nature of your risks, and how long you need coverage for past events.

An occurrence-based policy is generally a safer and simpler choice because it offers long-term protection, even if a business closes, changes providers, or lets its policy lapse. It provides peace of mind that any covered incidents will be addressed, regardless of when the claim is filed. However, these policies tend to be more expensive because insurers take on greater risk by covering claims years after the policy ends.

A claims-made policy is often less expensive initially but requires a long-term commitment to continuous coverage. Businesses that choose this type of policy must be diligent in maintaining active insurance. If a claims-made policy is allowed to expire without arranging for tail insurance, the business will lose all coverage for past incidents.

For industries where claims often arise years after an incident occurs—such as professional services, healthcare, or financial consulting—a claims-made policy can be risky if not carefully managed.

Understanding Tail Insurance: The Key to Continued Protection

Since claims-made policies only cover claims reported while the policy is active, businesses that cancel or switch their insurance could suddenly lose coverage for past services or actions. This is where tail insurance, also known as an Extended Reporting Period (ERP) endorsement, becomes crucial.

Tail insurance extends the period during which a business can report claims for incidents that occurred while the original claims-made policy was active. This ensures that even after the policy is canceled, claims related to past events remain covered.

For example, if a doctor has a claims-made malpractice insurance policy and retires in 2025, they might still be sued by a former patient for an incident that happened in 2023. Without tail insurance, the doctor would have no coverage for that claim. However, if they purchased tail insurance, their former policy would continue covering any claims for incidents that occurred before retirement.

Tail insurance is particularly important when:

• A business switches from a claims-made policy to an occurrence-based policy

• A professional retires or leaves an industry but still wants protection from past claims

• A business is acquired or merges with another company and needs to maintain protection for past actions

The cost of tail insurance varies but can be significant, sometimes amounting to 200% or more of the expiring policy’s annual premium. Despite the cost, it is often a necessary investment to avoid uninsured liabilities from past work.

Real-World Example: Why the Right Insurance Matters

Consider two consultants: John and Sarah, both of whom provided business consulting services in 2020. John had an occurrence-based professional liability policy, while Sarah had a claims-made policy. In 2023, a former client sued both of them, alleging that their advice caused financial losses.

John was covered by his 2020 occurrence-based policy, even though he switched insurance providers in 2021. Sarah, on the other hand, had canceled her claims-made policy in 2022 without purchasing tail insurance. As a result, her previous insurer denied the claim, leaving her personally liable for legal fees and damages.

This scenario highlights how a lack of understanding about claims-made policies can lead to costly consequences.

Final Thoughts on Choosing the Right Policy

Selecting the right type of insurance coverage is one of the most important risk-management decisions a business owner can make. Occurrence-based policies offer long-term peace of mind, ensuring that claims from past events remain covered, even if the business closes or changes providers. Claims-made policies, while often more affordable in the short term, require ongoing coverage and careful planning to avoid gaps in protection.

If you currently have or are considering a claims-made policy, be proactive about understanding tail insurance and how it may impact your future liability. A policy lapse or cancellation without proper tail coverage can leave your business vulnerable to lawsuits for past services, even years after you have stopped working with a client or patient.

For businesses unsure of which coverage type best suits their needs, consulting with an experienced insurance attorney or broker is essential. If you need legal guidance on insurance policies, liability risks, or contract review, contact the Law Offices of Peter J. Lamont at (201) 904-2211 or visit www.pjlesq.com to ensure your business remains protected.

Contact us today to discuss your business or legal matter. Put our 20+ years of legal experience to work for you.

---

For detailed insights and legal assistance on topics discussed in this post, including litigation, contact the Law Offices of Peter J. Lamont at our Bergen County Office. We're here to answer your questions and provide legal advice. Contact us at (201) 904-2211 or email us at  info@pjlesq.com.

Interested in More Legal Insights?

Explore our range of resources on business and legal matters. Subscribe to our podcast and YouTube channel for a wealth of information covering various business and legal topics. For specific inquiries or to discuss your legal matter with an attorney from our team, please email me directly at pl@pjlesq.com or call at (201) 904-2211. Your questions are important to us, and we look forward to providing the answers you need.

About Peter J. Lamont, Esq.

Peter J. Lamont is a nationally recognized attorney with significant experience in business, contract, litigation, and real estate law. With over two decades of legal practice, he has represented a wide array of businesses, including large international corporations. Peter is known for his practical legal and business advice, prioritizing efficient and cost-effective solutions for his clients.

Peter has an Avvo 10.0 Rating and has been acknowledged as one of America's Most Honored Lawyers since 2011. 201 Magainze and Lawyers of Distinction have also recognized him for being one of the top business and litigation attorneys in New Jersey. His commitment to his clients and the legal community is further evidenced by his active role as a speaker, lecturer, and published author in various legal and business publications.

As the founder of the Law Offices of Peter J. Lamont, Peter brings his Wall Street experience and client-focused approach to New Jersey, offering personalized legal services that align with each client's unique needs and goals​.

---

DISCLAIMERS: The contents of this website and post are intended to convey general information only and not to provide legal advice or opinions. The contents of this website and the posting and viewing of the information on this website should not be construed as, and should not be relied upon for, legal or tax advice in any particular circumstance or fact situation. Nothing on this website is an offer to represent you, and nothing on this website is intended to create an attorney‑client relationship. An attorney-client relationship may only be established through direct attorney‑to‑client communication that is confirmed by the execution of an engagement agreement.

As with any legal issue, it is important that you obtain competent legal counsel before making any decisions about how to respond to a subpoena or whether to challenge one - even if you believe that compliance is not required. Because each situation is different, it may be impossible for this article to address all issues raised by every situation encountered in responding to a subpoena. The information below can give you guidance regarding some common issues related to subpoenas, but you should consult with an attorney before taking any actions (or refraining from acts) based on these suggestions. Separately, this post will focus on New Jersey law. If you receive a subpoena in a state other than New Jersey, you should immediately seek the advice of an attorney in your state, as certain rules differ in other states.

Disclaimer: Recognition by Legal Awards

The legal awards and recognitions mentioned above are not an endorsement or a guarantee of future performance. These honors reflect an attorney's past achievements and should not be considered as predictors of future results. They are not intended to compare one lawyer's services with other lawyers' services. The process for selecting an attorney for these awards can vary and may not include a review of the lawyer's competence in specific areas of practice. Potential clients should perform their own evaluation when seeking legal representation. No aspect of this advertisement has been approved by the Supreme Court of New Jersey.